The Income Tax Ordinance, 2001 Up-to July 2010

2010 – 2011 The Income Tax Ordinance, 2001 CONTENTS INCOME TAX ORDINANCE 2001 (XLIX OF 2001) TABLE OF CONTENTS CHAPTER 1 PRELIMINARY 1. 2. 3. Short title, extent and commencement Definitions Ordinance to override other laws 1 1 13 CHAPTER II CHARGE TO TAX 4. 5. 6. 7. 8. Tax on taxable income Tax on dividends Tax on certain payments to non-residents Tax on shipping and air transport income of a nonresident person General provisions relating to taxes imposed under sections 5, 6 and 7 14 14 14 15 15 CHAPTER III TAX ON TAXABLE INCOME PART I COMPUTATION OF TAXABLE INCOME 9. 10. 11. Taxable income Total income Heads of income 16 16 16 PART II HEAD OF INCOME SALARY 12. 13. 14. Salary Value of perquisites Employee share schemes 17 19 20 PART III HEAD OF INCOME INCOME FROM PROPERTY 15. 16. 17. Income from property Non-adjustable amounts received in relation to buildings OMITTED Deductions in computing income chargeable under i 21 22 22 2010 – 2011 The Income Tax Ordinance, 2001 the head "Income from property" PART IV HEAD OF INCOME INCOME FROM BUSINESS Division I Income from Business 18. 19. Income from business Speculation business 23 24 Division II Deductions General Principles 20. 21. Deductions in computing income chargeable under the head "Income from Business" Deductions not allowed 25 25 Division III Deductions Special Provisions 22. 23. 23A. 23B. 24. 25. 26. 27. 28. 29. 29A 30. 31. Depreciation Initial allowance First Year Allowance Accelerated depreciation to alternate energy projects. Intangibles Pre-commencement expenditure Scientific research expenditure Employee training and facilities Profit on debt, financial costs and lease payments Bad debts Provision Regarding Consumer Loans Profit on non-performing debts of a banking company or development finance institution Transfer to participatory reserve 27 30 30 31 31 32 33 33 33 34 35 35 36 Division IV TAX ACCOUNTING 32. 33. 34. 35. 36. Method of accounting Cash-basis accounting Accrual-basis accounting Stock-in-trade Long-term contracts 36 36 37 37 38 PART V HEAD OF INCOME CAPITAL GAINS 37. Capital gains 39 ii 2010 – 2011 The Income Tax Ordinance, 2001 37A. 38. Capital gain on disposal of securities Deduction of losses in computing the amount chargeable under the head "Capital Gains" 40 41 PART VI HEAD OF INCOME INCOME FROM OTHER SOURCES 39. 40. Income from other sources Deductions in computing income chargeable under the head "Income from Other Sources" 42 43 PART VII EXEMPTIONS AND TAX CONCESSIONS 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. Agricultural income Diplomatic and United Nations exemptions Foreign government officials Exemptions under international agreements President's honours Profit on debt Scholarships Support payments under an agreement to live apart Federal and Provincial Government, and local authority income Foreign-source income of short-term resident individuals Foreign-source income of returning expatriates Omitted Exemptions and tax concessions in the Second Schedule Exemptions and tax provisions in other laws Limitation of exemption 44 44 45 45 45 45 46 46 46 47 47 47 57 48 48 PART VIII LOSSES 56. 56A. 57. 57A. 58. 59. 59A. 59AA 59B. Set off of losses Set off of losses of companies operating hotels Carry forward of business losses Set off of losses consequent to amalgamation Carry forward of speculation business losses Carry forward of capital losses Limitations on set off and carry forward of lossess Group Taxation Group Relief 49 49 49 50 51 51 51 52 52 PART IX DEDUCTIBLE ALLOWANCES 60. 60A. 60B. Zakat Workers’ Welfare Fund Workers’ Participation Fund iii 54 55 55 2010 – 2011 The Income Tax Ordinance, 2001 PART X TAX CREDITS 61. 62. 63. 64. 65. 65A. 65B. 65C. Charitable donations Investment in shares Retirement annuity scheme Profit on debt Miscellaneous provisions relating to tax credits Tax credit to a person registered under the Sales Tax Act, 1990 Tax credit for investment Tax credit for enlistment 55 56 57 58 59 59 59 60 CHAPTER-IV COMMON RULES PART I GENERAL 66. 67. 68. 69. 70. 71. 72. 73. Income of joint owners Apportionment of deductions Fair market value Receipt of income Recouped expenditure Currency conversion Cessation of source of income Rules to prevent double derivation and double deductions 61 61 61 61 62 62 62 62 PART II TAX YEAR 74. Tax year 62 PART III ASSETS 75. 76. 77. 78. 79. Disposal and acquisition of assets Cost Consideration received Non-arm's length transactions Non-recognition rules 64 64 65 66 66 CHAPTER V PROVISIONS GOVERNING PERSONS PART I CENTRAL CONCEPTS Division I Persons 80. Person 67 Division II iv 2010 – 2011 The Income Tax Ordinance, 2001 Resident and Non-resident Persons 81. 82. 83. 84. Resident and non-resident persons Resident individual Resident company Resident association of persons 68 68 68 68 Division III Associates 85. Associates 69 PART II INDIVIDUALS Division I Taxation of Individuals 86. 87. Principle of taxation of individuals Deceased individuals 70 70 Division II Provisions Relating to Averaging 88. 88A. 89. An individual as a member of an association of persons Share profits of company to be added to taxable income. Authors 70 71 71 Division III Income Splitting 90. 91. Transfers of assets Income of a minor child 71 72 PART III ASSOCIATIONS OF PERSONS 92. 93. Principles of taxation of associations of persons Omitted 72 72 PART IV COMPANIES 94. 95. 96. 97. Principles of taxation of companies Disposal of business by individual to wholly-owned company Disposal of business by association of persons to wholly-owned company Disposal of asset between wholly-owned companies v 73 73 74 75 2010 – 2011 The Income Tax Ordinance, 2001 97A. Disposal of Asset under a scheme of arrangement and reconstruction. 76 PART V COMMON PROVISIONS APPLICABLE TO ASSOCIATIONS OF PERSONS AND COMPANIES 98. Change in control of an entity 78 PART VA TAX LIABILITY IN CERTAIN CASES 98A. 98B. 98C. Change in the constitution of an association of persons Discontinuance of business or dissolution of an association of persons Succession to business, otherwise than on death 79 79 79 CHAPTER-VI SPECIAL INDUSTRIES PART I INSURANCE BUSINESS 99. Special provisions relating to insurance business 80 PART II OIL, NATURAL GAS AND OTHER MINERAL DEPOSITS 100. 100A. Special provisions relating to the production of oil and natural gas, and exploration and extraction of other mineral deposits Special Provisions relating to banking business 80 80 CHAPTER VII INTERNATIONAL PART I GEOGRAPHICAL SOURCE OF INCOME 101. Geographical source of income 81 PART II TAXATION OF FOREIGN-SOURCE INCOME OF RESIDENTS 102. 103. 104. Foreign source salary of resident individuals Foreign tax credit Foreign losses PART III vi 83 83 84 2010 – 2011 The Income Tax Ordinance, 2001 TAXATION OF NON-RESIDENTS 105. 106. 107. Taxation of a permanent establishment in Pakistan of a non-resident person Thin capitalization PART IV AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION Agreements for the avoidance of double taxation and prevention of fiscal evasion 84 85 86 CHAPTER VIII ANTI-AVOIDANCE 108. 109. 110. 111. 112. Transactions between associates Re-characterization of income and deductions Salary paid by private companies Unexplained income or assets Liability in respect of certain security transactions 87 87 87 87 88 CHAPTER IX MINIMUM TAX 113. 113A. 113B Minimum tax on the income of certain persons Tax on Income of certain persons Taxation of income of certain retailers 89 91 91 CHAPTER X PROCEDURE PART I RETURNS 114. 115. 116. 117. 118. 119. Return of income Persons not required to furnish a return of income Wealth statement Notice of discontinued business Method of furnishing returns and other documents Extension of time for furnishing returns and other documents 93 95 97 98 98 99 PART II ASSESSMENTS 120. 120A. 121. 122. 122A. 122B. 122C. 123. Assessments Investment Tax on income Assessment of persons who have not furnished a return Amendment of assessments Revision by the Commissioner Revision by the Regional Commissioner Provisional assessment Provisional assessment in certain cases vii 100 101 102 102 104 105 105 105 2010 – 2011 The Income Tax Ordinance, 2001 124. 124A. 125. 126. Assessment giving effect to an order Powers to tax authorities to modify orders, etc. Assessment in relation to disputed property Evidence of assessment 105 107 107 107 PART III APPEALS 127. 128. 129. 130. 131. 132. 133. 134. 134A. 135. 136. Appeal to the Commissioner (Appeals) Procedure in appeal Decision in appeal Appointment of the Appellate Tribunal Appeal to the Appellate Tribunal Disposal of appeals by the Appellate Tribunal Reference to High Court Appeal to Supreme Court [omitted] Alternate Dispute Resolution Omitted by the Finance Ordinance, 2002 Burden of proof 108 109 109 110 112 113 114 115 116 117 117 PART IV COLLECTION AND RECOVERY OF TAX 137. 138. 138A. 138B. 139. 140. 141. 142. 143. 144. 145. 146. 146A. 146B. Due date for payment of tax Recovery of tax out of property and through arrest of taxpayer Recovery of tax by District Officer (Revenue) Estate in bankruptcy Collection of tax in the case of private companies and associations of persons Recovery of tax from persons holding money on behalf of a taxpayer Liquidators Recovery of tax due by non-resident member of an association of persons Non-resident ship owner or chatterer Non-resident aircraft owner or chatterer Collection of tax from persons leaving Pakistan permanently Recovery of tax from persons assessed in Azad Jammu and Kashmir Initiation, validity, etc., of recovery proceedings. Tax Arrears settlement incentives scheme 118 118 119 119 119 120 121 121 122 122 122 123 123 124 PART V ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE Division I Advance Tax Paid by the Taxpayer 147. Advance tax paid by the taxpayer viii 125 2010 – 2011 The Income Tax Ordinance, 2001 Division II Advance Tax Paid to a Collection Agent 148. Imports 129 Division III Deduction of Tax at Source 149. 150. 151. 152. 153. 153A. 154. 155. 156. 156A. 156B. 157. 158. Salary Dividends Profit on debt Payments to non-residents Payments for goods and services Payments to non-resident media persons. Exports Income from property Prizes and winnings Petroleum Products Withdrawal of Balance under Pension Fund Omitted by the Finance Ordinance, 2002 Time of deduction of tax 134 134 135 135 138 144 144 145 145 146 146 147 147 Division IV General Provisions Relating to the Advance Payment of Tax or the Deduction of Tax at Source 159. 160. 161. 162. 147 148 148 149 163. 164. Exemption or lower rate certificate Payment of tax collected or deducted Failure to pay tax collected or deducted Recovery of tax from the person from whom tax was not collected or deducted Recovery of amounts payable under this Division Certificate of collection or deduction of tax 165. 166. 167. 168. 169. Statements Priority of tax collected or deducted Indemnity Credit for tax collected or deducted Tax collected or deducted as a final tax 149 151 151 151 152 149 149 PART VI REFUNDS 170. 171. Refunds Additional payment for delayed refunds 154 154 PART VII REPRESENTATIVES 172. 173. Representatives Liability and obligations of representatives PART VIII ix 155 156 2010 – 2011 The Income Tax Ordinance, 2001 RECORDS, INFORMATION COLLECTION AND AUDIT 174. 175. 176. 177. 178. 179. 180. Records Power to enter and search premises Notice to obtain information or evidence Audit Assistance to Commissioner Accounts, documents, records and computer-stored information not in Urdu or English language Power to collect information regarding exempt income 157 157 158 159 161 161 161 PART IX NATIONAL TAX NUMBER CARD 181. 181A. National Tax Number Card Active taxpayers’ list 162 162 PART X PENALTY 182. 183. 184. 185. 186. 187. 188. 189. 190. Penalty for failure to furnish a return or statement Penalty for non-payment of tax Penalty for concealment of income [OMITTED] Penalty for failure to maintain records [OMITTED] Penalty for non-compliance with notice [OMITTED] Penalty for making false or misleading statements [OMITTED] Penalty for failure to give notice [OMITTED] Penalty for obstruction [OMITTED] Imposition of penalty [OMITTED] 163 166 166 166 166 167 167 167 167 PART XI OFFENCES AND PROSECUTIONS 191. 192. 192A. 193. 194. 195. 196. 197. 198. 199. 200. 201. Prosecution for non-compliance with certain statutory obligations Prosecution for false statement in verification Prosecution for concealment of income Prosecution for failure to maintain records Prosecution for improper use of National Tax Number Card Prosecution for making false or misleading statements Prosecution for obstructing an income tax authority Prosecution for disposal of property to prevent attachment Prosecution for unauthorized disclosure of information by a public servant Prosecution for abetment Offences by companies and associations of persons Institution of prosecution proceedings without x 168 168 168 169 169 169 170 170 170 170 170 170 2010 – 2011 The Income Tax Ordinance, 2001 202. 203. 203A. 204. prejudice to other action Power to compound offences Trial by Special Judge Appeal against the order of a Special Judge Power to tender immunity from prosecution 170 171 171 171 PART XII ADDITIONAL TAX 205. 205A. Additional tax Default surcharge Reduction in additional tax default surcharge, consequential to reduction in tax or penalty 172 173 PART XIII CIRCULARS 206. 206A. Circulars Advance ruling 173 173 CHAPTER XI ADMINISTRATION PART I GENERAL 207. 208. 209. 210. 211. 212. 213. 214. 214A. 214B. 214C. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226. 227. Income Tax Authorities Appointment of income tax authorities Jurisdiction of income tax authorities Delegation Power or function exercised Authority of approval Guidance to income tax authorities Income tax authorities to follow orders of the Central Board of Revenue Condonation of time limit Power of the Board to call for records Selection for audit by the Board Furnishing of returns, documents etc. Disclosure of information by a public servant Forms and notices; authentication of documents Service of notices and other documents Tax or refund to be computed to the nearest Rupee Receipts for amounts paid Rectification of mistakes Appointment of expert Appearance by authorized representative Proceedings under the Ordinance to be judicial proceedings Proceedings against companies under liquidation Computation of limitation period Bar of suits in Civil Courts xi 174 175 175 176 177 177 177 177 178 178 178 179 179 181 181 182 182 182 182 182 184 184 184 184 2010 – 2011 The Income Tax Ordinance, 2001 PART II DIRECTORATE-GENERAL OF INSPECTION 228. 229. 230. 231. Appointment of Directorate-General of Inspection Inspection Authorities [Omitted] Jurisdiction of Inspection Authorities [Omitted] Functions and Powers of Directorate [Omitted] 185 185 185 185 PART III DIRECTORATE-GENERAL OF WITHHOLDING TAXES 230A. Directorate-General of Withholding Taxes 186 CHAPTER XII TRANSITIONAL ADVANCE TAX PROVISIONS 231A. 231AA. 231B. 232. 233. 233A. 234. 234A. 235. 236. 236A. 236B. Cash Withdrawal from Bank Advance tax on transactions in bank Advance tax on private motor car Omitted by the Finance Ordinance, 2002 Brokerage and Commission Collection of tax by a stock exchange registered in Pakistan Transport Business CNG Stations Electricity Consumption Telephone users Advance tax at the time of sale by auction Advance tax on purchase of air ticket 186 186 187 187 188 189 190 191 191 193 194 194 CHAPTER XIII MISCELLANEOUS 237. 237A. 238. 239. 239A. 239B. 240. Power to make rules Electronic Record Repeal Savings Transition to Federal Board of Revenue Reference to authorities Removal of difficulties xii 195 196 196 196 198 198 198 2010 – 2011 The Income Tax Ordinance, 2001 SCHEDULES FIRST SCHEDULE PART I RATES OF TAX 201 Division I Rates of Tax for Individuals and Association of Persons 201 Division IA Rate of Tax on certain persons 207 Division IA Rates of tax for Association of Persons 207 Division II Rates of Tax for Companies 207 Division III Rate of Dividend Tax 208 Division IV Rate of Tax on Certain Payments to Non-residents 208 Division V Rate of Tax on Shipping or Air Transport Income of a Non-resident Person 208 Division VI Income from Property 209 Division VII Capital Gains on disposal of Securities PART II RATES OF ADVANCE TAX Tax on Import of Goods 211 213 PART III DEDUCTION OF TAX AT SOURCE 213 Division I Profit on debt 213 Division II Payments to non-residents 214 Division III Payments for Goods or Services 215 xiii 2010 – 2011 The Income Tax Ordinance, 2001 DIVISION IIIA Payments to non-resident media persons 216 Division IV Exports 216 Division V Income from Property 217 Division VI Prizes and Winnings 218 Division VIA Petroleum Products 219 Division VIB CNG Stations 219 PART IV DEDUCTION OR COLLECTION OF ADVANCE TAX 221 Division I [OMITTED] Transfer of Funds 221 Division II Brokerage Commission 221 Division IIA Rates for Collection of Tax by a Stock Exchange Registered in Pakistan 221 Division III Tax on Motor Vehicles 222 Division IV Electricity Consumption 223 Division V Telephone users 224 Division VI Cash Withdrawal from Bank 224 Division VIA Telephone Users 224 DIVISION VII PURCHASE OF MOTOR CARS AND JEEPS 225 DIVISION VIII Advance tax at the time of sale by auction 225 xiv 2010 – 2011 The Income Tax Ordinance, 2001 Division IX 225 SECOND SCHEDULE EXEMPTIONS AND TAX CONCESSIONS PART I Exemptions from total income 227 PART II Reduction in tax rates 261 PART III Reduction in tax liability 271 PART IV Exemption from specific provisions 275 THIRD SCHEDULE PART I Depreciation 297 PART II Initial allowance and first year allowance 299 PART III Pre-commencement expenditure 300 FOURTH SCHEDULE Rules for the computation of the profits and gains of Insurance Business 301 FIFTH SCHEDULE 305 PART I Rules for the computation of the profits and gains from the exploration and production of petroleum 305 PART II Rules for the computation of the profits and gains from the exploration and extraction of minerals deposits (other than petroleum) 309 SIXTH SCHEDULE 311 PART I Recognized Provident Funds 311 xv 2010 – 2011 The Income Tax Ordinance, 2001 PART II Approved Superannuation Funds 317 PART III Approved Gratuity Funds 321 SEVENTH SCHEDULE RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS OF A BANKING COMPANY AND TAX PAYABLE THEREON ****************** xvi 325 2010 – 2011 The Income Tax Ordinance, 2001 1 F.No.2(1)/2001-Pub.- The following Ordinance promulgated by the President is hereby published for general information:AN ORDINANCE to consolidate and amend the law relating to income tax WHEREAS it is expedient to consolidate and amend the law relating to income tax and to provide for matters ancillary thereto or connected therewith; WHEREAS the President is satisfied that circumstances exist which render it necessary to take immediate action; NOW, THEREFORE, in pursuance of the Proclamation of Emergency of the fourteenth day of October, 1999, and the Provisional Constitution Order No. 1 of 1999, read with Provisional Constitutional Amendment Order No. 9 of 1999, and in exercise of all powers enabling him in that behalf, the President of the Islamic Republic of Pakistan is pleased to make and promulgate the following Ordinance:CHAPTER I PRELIMINARY 1. Short title, extent and commencement.- (1) This Ordinance may be called the Income Tax Ordinance, 2001. (2) It extends to the whole of Pakistan. (3) It shall come into force on [the first day of July, 2002.]♦ 2. Definitions.- In this Ordinance, unless there is anything repugnant in the subject or context – (1) "accumulated profits" in relation to 1[distribution or payment of] a dividend, 2[include] – (a) any reserve made up wholly or partly of any allowance, deduction, or exemption admissible under this Ordinance; (b) for the purposes of 3[sub-clauses (a), (b) and (e) of clause (19)”] all profits of the company including income and gains of a trust up to the date of such distribution or such payment, as the case may be; and (c) for the purposes of 4[sub-clause (c) of clause (19)], includes all profits of the company including income and gains of a trust up to the date of its liquidation; 5[(1A) Ô “amalgamation” means the merger of one or more banking companies or non-banking financial institutions, 6[or insurance companies, 1[or companies owning and managing industrial undertakings 2[or ♦ Substituted by Finance Ordinance 2002 vide S.R.O.381(I)/2002 dated 15th June, 2002 for the words “such date as the Federal Government may, by notification in official Gazette, appoint.” 1 Inserted by Finance Act, 2003 2 The word “includes” substituted by the Finance Act, 2005. 3 Substituted for “clauses (a), (d) and (e) of sub-section (20)”, by the Finance Ordinance, 2002. 4 Substituted for “clause (c) of sub-section (20)”, by Finance Ordinance, 2002. 5 Inserted by the Finance Ordinance, 2002. Ô EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. AMALGAMATION OF COMPANIES. [Section 2(1A)] The term amalgamation was defined under section 2(1A) as “merger of one or more banking companies or non-banking financial institutions or insurance companies. The scope of this definition has been extended to the industrial sector as well where amalgamation takes place on or after July 1, 2005. Further more, previously both the merging companies had to be either public companies or companies incorporated under any law other than the companies Ordinance 1984. This restriction has also been relaxed by allowing one of the merging companies to be a private limited company. 6 Words inserted vide Finance Act, 2004 2010 – 2011 2 The Income Tax Ordinance, 2001 companies engaged in providing services and not being a trading company or companies]]] in either case least one of them] being a public company, or a company incorporated under any law, other than Companies Ordinance, 1984 (XLVII of 1984), for the time being in force, (the company or companies which so merge being referred to as the “amalgamating company” or companies and the company with which they merge or which is formed as a result of merger, as the “amalgamated company”) in such manner that – 3[at (a) the assets of the amalgamating company or companies immediately before the amalgamation become the assets of the amalgamated company by virtue of the amalgamation, otherwise than by purchase of such assets by the amalgamated company or as a result of distribution of such assets to the amalgamated company after the winding up of the amalgamating company or companies; 4[and] (b) the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation 5[.] 6[ ] (2) 130;] 7[“Appellate Tribunal” means the Appellate Tribunal Inland Revenue established under section (3) “approved gratuity fund” means a gratuity fund approved by the Commissioner in accordance with Part III of the Sixth Schedule; 8 [(3A) “Approved Annuity Plan” means an Annuity Plan approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Life Insurance Company registered with the SECP under Insurance Ordinance, 2000 (XXXIX of 2000);] [(3B) “Approved Income Payment Plan” means an Income Payment Plan approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;] 9 10[(3C) “Approved Pension Fund” means Pension Fund approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005, and managed by a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;] 11[(3D) “Approved Employment Pension or Annuity Scheme” means any employment related retirement scheme approved under this Ordinance, which makes periodical payment to a beneficiary i.e. pension or annuity such as approved superannuation fund, public sector pension scheme and Employees Old-Age Benefit Scheme; (3E) “Approved Occupational Savings Scheme” means any approved gratuity fund or recognized provident fund;] (4) “approved superannuation fund” means a superannuation fund, or any part of a superannuation fund, approved by the Commissioner in accordance with Part II of the Sixth Schedule; 1[(5) “assessment” includes re-assessment and amended assessment and the cognate expressions shall be construed accordingly;] Inserted by the Finance Act, 2005. Words inserted by the Finance Act, 2007. 3 Inserted by the Finance Act, 2005. 4 Added by the Finance Act, 2005. 5 The semi-colon and word “and” substituted by the Finance Act, 2005. 6 Omitted by the Finance Act, 2005. The omitted clause (c) read as follows: “(c) the scheme of amalgamation is approved by the State bank of Pakistan or by the Securities and Exchange Commission of Pakistan A[on or before thirtieth day of June, B[2006]];]” A Inserted by the Finance Act, 2003. 7 Substituted for ““Appellate Tribunal” means the Appellate Tribunal established under section 130;” vide the Finance Act, 2010. 8 Inserted by the Finance Act, 2005. 9 Inserted by the Finance Act, 2005. 10 Inserted by the Finance Act, 2005. 11 Clause 3D & 3E inserted by the Finance Act, 2006 1 2 2010 – 2011 2[(5A) 3 The Income Tax Ordinance, 2001 “assessment year” means assessment year as defined in the repealed Ordinance;] 3[(5B) “asset management company” means an asset management company as defined in the NonBanking Finance Companies and Notified Entities Regulations, 2007;] (6) “association of persons” means an association of persons as defined in section 80; (7) “banking company” means a banking company as defined in the Banking Companies Ordinance, 1962 (LVII of 1962) and includes any body corporate which transacts the business of banking in Pakistan; (8) “bonus shares” includes bonus units in a unit trust; (9) “business” includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation, but does not include employment; (10) “capital asset” means a capital asset as defined in section 37; (11) 4[“Board” means the Federal Board of Revenue established under the Federal Board of Revenue Act, 1924 (IV of 1924), and on the commencement of Federal Board of Revenue Act, 2007, the Federal Board of Revenue established under section 3 thereof;] 5[(11A) “charitable purpose” includes relief of the poor, education, medical relief and the advancement of any other object of general public utility;] 6[(11B) “Chief Commissioner” means a person appointed as Chief Commissioner Inland Revenue under section 208 and includes a Regional Commissioner of Income Tax and a Director General of Income Tax and Sales Tax;] (12) “company” means a company as defined in section 80; [(13) “Commissioner” means a person appointed as Commissioner Inland Revenue under section 208 and includes any other authority vested with all or any of the powers and functions of the Commissioner;] 7 8[(13A) “Commissioner (Appeals)” means a person appointed as Commissioner Inland Revenue (Appeals) under section 208;] 9[(13B) “Contribution to an Approved Pension Fund” means contribution as defined in rule 2(j) of the Voluntary Pension System Rules, 2005 [1];] 1 Substituted by the Finance Ordinance, 2002. The original clause read as follows: “(5) “assessment” means – (a) an assessment referred to in section 120; (b) an assessment raised under section 121; (c) an amended assessment under section 122; (d) a demand for an amount due under sections 141, 142, 143 and 144; or (e) an assessment of penalty under section 190;”. 2 Inserted by the Finance Ordinance, 2002 3 Clause (5B) substituted vide Finance Act, 2008, earlier this clause inserted by the Finance Ordinance, 2002, the old text read as follows :(5B) “assets management company” means a company registered under the Assets Management companies Rules, 1995; 4 Clause (11) substituted by the Finance Act, 2007, the old clause read as follows: “Central Board of Revenue” means the Central Board of Revenue established under the Central Board of Revenue Act, 1924 (IV of 1924); 5 Inserted by the Finance Ordinance, 2002. 6 Clause (11B) inserted vide the Finance Act, 2010. 7 Substituted by the Finance Act, 2010, the replaced text read as follows: [(13) “Commissioner” means a person appointed as a Commissioner of Income Tax under section 208, and includes a taxation officer vested with all or any of the powers and functions of the Commissioner;] Substituted vide Finance Ordinance, 2002. The original clause read as follows: “(13) “Commissioner” means a person appointed as a Commissioner of Income Tax under section 209”. 8 Substituted by the Finance Act, 2010, the replaced text read as follows: [(13A) “Commissioner (Appeals)” means a person appointed as a Commissioner of Income Tax (Appeals) under section 208;] (Issued vide the Finance Ordinance, 2002) 9 Inserted by the Finance Act, 2005. 2010 – 2011 4 The Income Tax Ordinance, 2001 (14) “co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1925 (VII of 1925) or under any other law for the time being in force in Pakistan for the registration of cooperative societies; (15) “debt” means any amount owing, including accounts payable and the amounts owing under promissory notes, bills of exchange, debentures, securities, bonds or other financial instruments; (16) “deductible allowance” means an allowance that is deductible from total income under Part IX of Chapter III; (17) “depreciable asset” means a depreciable asset as defined in section 22; (18) “disposal” in relation to an asset, means a disposal as defined in section 75; (19) “dividend” includes (a) any distribution by a company of accumulated profits to its shareholders, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets including money of the company; (b) any distribution by a company, to its shareholders of debentures, debenture-stock or deposit certificate in any form, whether with or without profit, 2[ ] to the extent to which the company possesses accumulated profits whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalised or not; [3] (e) any payment by a private company 4[as defined in the Companies Ordinance, 1984 (XLVII of 1984)] or trust of any sum (whether as representing a part of the assets of the company or trust, or otherwise) by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company or trust, in either case, possesses accumulated profits; 5[or] 6[(f) 1[remittance of] after tax profit of a branch of a foreign company operating in Pakistan;] Words “, but not exceeding five hundred thousand rupees in a tax year” Omitted by the Finance Act, 2006 The words “and any distribution to its shareholders of shares by way of bonus or bonus shares”, omitted by the Finance Ordinance, 2002 3 Word “or” omitted by the Finance Act, 2008. 4 Inserted by Finance Act, 2003 5 Word “or” inserted by the Finance Act, 2008. 6 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009Through Finance Act, 2008 remittances of after tax profit by a branch of foreign company operating in Pakistan were taxed as dividend income @ 10%. However, due to absence of word “remittance” in the newly inserted sub-section 2(19)(f), a mistaken view could have been taken to the effect that merely showing of accumulated profits of a branch are taxable as dividend income, whereas the intention of the legislature was to deem the remittance of after tax profit, by a branch to its head office, outside Pakistan, as dividend income. In order to remove this ambiguity amendment has been made in the said clause by virtue of which the “remittance of after tax profit” would be treated as dividend income. 1.1 Apart from above, petroleum exploration and production (E&P) companies operating in Pakistan also became liable to pay tax on such remittances treated as ‘dividend’ whereas their rate of tax was frozen by Petroleum Concession Agreements signed between the Government of Pakistan and E&P Companies. In view of this international commitment, such companies have been excluded from the purview of aforesaid clause.a new sub-clause (iv) in Clause (f) of sub-section (19) of section 2 of the Ordinance has been inserted by virtue of which the remittances of after tax profit by a branch of non-resident Petroleum Exploration and Production Company operating in Pakistan has been excluded from the ambit of the dividend. 1.2 Consequential amendment has also been made in subsection (1) of section 5, which imposes a tax on dividend income. Sub-clause (f) inserted by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008BRANCH REMITTANCE TAX ON TRANSFER OF PROFITS ABROAD. [Section 2(19)(f)]. 1 2 2010 – 2011 5 The Income Tax Ordinance, 2001 but does not include (i) a distribution made in accordance with 2[sub-clause] (c) or (d) in respect of any share for full cash consideration, or redemption of debentures or debenture stock, where the holder of the share or debenture is not entitled in the event of liquidation to participate in the surplus assets; (ii) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; [3] (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of 4[sub-clause] (c) to the extent to which it is so set off; 5[and] 6[(iv) remittance of after tax profit by a branch of Petroleum Exploration and Production (E&P) foreign company, operating in Pakistan.] [(19A) “Eligible Person”, for the purpose of Voluntary Pension System Rules, 2005, means an individual Pakistani who 7[holds] a valid National Tax Number 8[or Computerized National Identity Card 9[or National Identity Card for Overseas Pakistanis] issued by the National Database and Registration Authority] [10]11[:]] 12[Provided that the total tax credit available for the contribution made to approved employment pension or annuity scheme and approved pension fund under Voluntary Pension System Rules, 2005, should not exceed the limit prescribed or specified in section 63.] 13[(19B) the expressions “addressee”, “automated”, “electronic”, “electronic signature”, “information”, “information system”, “originator” and “transaction”, shall have the same meanings as are assigned to them in the Electronic Transactions Ordinance, 2002 (LI of 2002); (19C) “electronic record” includes the contents of communications, transactions and procedures under this Ordinance, including attachments, annexes, enclosures, accounts, returns, statements, certificates, applications, forms, receipts, acknowledgements, notices, orders, judgments, approvals, notifications, circulars, rulings, documents and any other information associated with such communications, transactions and procedures, created, sent, forwarded, replied to, transmitted, distributed, broadcast, stored, held, copied, downloaded, displayed, viewed, read, or printed, by one or several electronic resources and any other information in electronic form; (19D) “electronic resource” includes telecommunication systems, transmission devices, electronic video or audio equipment, encoding or decoding equipment, input, output or connecting devices, data processing A non-resident can form a Pakistani company for operation in Pakistan or conduct business activity through its branch in Pakistan. After tax profits, in the case of a foreign controlled resident company are distributed through payment of dividend which attracts 10% income tax whereas, such profits in the case of a branch of a non-resident company are remitted outside Pakistan without payment of any tax. This had created disparity of taxation between the said two situations. 1.1 After tax profits so transferred by a branch of a foreign company out of Pakistan has been treated as dividend income, under sub-clause (f) of clause (19) of section 2 of the Income Tax Ordinance, 2001 (hereinafter to be referred as “Ordinance”) and chargeable to tax @ 10% of gross amount, vide the Finance Act, 2008. It will be in line with the international best practices prevalent in European Countries, USA, and Canada. It will also check outflow of foreign exchange and provide level playing field to non-residents operating by incorporating a Pakistani company or through branch of a foreign company. 1 Substituted for “any” vide the Finance Act, 2009. 2 Substituted for “clause” by the Finance Ordinance, 2002 3 Word “and” omitted vide the Finance Act, 2009. 4 Substituted for “clause” by the Finance Ordinance, 2002 5 Word inserted vide the Finance Act, 2009. 6 Paragraph (iv) added vide the Finance Act, 2009. 7 Substituted for “has obtained” by the Finance Act, 2007. 8 Words inserted by the Finance Act, 2007 9 Words inserted by the Finance Act, 2008. 10 Words “but does not include an individual who is entitled to benefit under any other approved employment pension or annuity scheme” omitted by the Finance Act, 2006 11 Substituted for semicolon by the Finance Act, 2006 12 Proviso added by the Finance Act, 2006 13 Clauses 19B, 19C, 19D and 19E inserted by the Finance Act, 2008. 2010 – 2011 6 The Income Tax Ordinance, 2001 or storage systems, computer systems, servers, networks and related computer programs, applications and software including databases, data warehouses and web portals as may be prescribed by the Board from time to time, for the purpose of creating electronic record; (19E) “telecommunication system” includes a system for the conveyance, through the agency of electric, magnetic, electro-magnetic, electro-chemical or electro-mechanical energy, of speech, music and other sounds, visual images and signals serving for the impartation of any matter otherwise than in the form of sounds or visual images and also includes real time online sharing of any matter in manner and mode as may be prescribed by the Board from time to time.] (20) “employee” means any individual engaged in employment; (21) “employer” means any person who engages and remunerates an employee; (22) “employment includes – (a) a directorship or any other office involved in the management of a company; (b) a position entitling the holder to a fixed or ascertainable remuneration; or (c) the holding or acting in any public office; (23) “fee for technical services” means any consideration, whether periodical or lump sum, for the rendering of any managerial, technical or consultancy services including the services of technical or other personnel, but does not include – (a) consideration for services rendered in relation to a construction, assembly or like project undertaken by the recipient; or (b) consideration which would be income of the recipient chargeable under the head “Salary”; (24) 1“financial institution” means an institution 2[as defined] under the Companies Ordinance, 3[1984 (XLVII of 1984)]4 [ ]; (25) “finance society” includes a co-operative society which accepts money on deposit or otherwise for the purposes of advancing loans or making investments in the ordinary course of business; (26) “firm” means a firm as defined in section 80; (27) “foreign-source income” means foreign-source income as defined in sub-section (16) of section 101. (28) “House Building Finance Corporation” means the Corporation constituted under the House Building Finance Corporation Act, 1952 (XVIII of 1952); [(29) “income” includes any amount chargeable to tax under this Ordinance, any amount subject to collection 6[or deduction] of tax under section 148, 7[150, 152(1), 153, 154, 156, 156A, 233, 233A and], subsection (5) of section 234, 8[any amount treated as income under any provision of this Ordinance] and any 5 EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. DEDUCTIBILITY OF BAD DEBTS. [SECTION 2(24)] A bad debt was previously deductible only in respect of money lent by a financial institution. A “financial institution” was defined, in clause (24) of section 2, to mean an institution “notified” under the Companies Ordinance. This had restricted the applicability as most of the financial institutions were not covered by this provision. To enlarge the scope of the provision the expression “notified” has been substituted by “defined”. 2 The word “notified” substituted by the Finance Act, 2005. 3 Substituted for “1980 (XXXI of 1980)” by the Finance Ordinance, 2002 4 Substituted For “by the Federal Government in the official Gazette as a financial institution” by Finance Act, 2003. 5 Substituted by the Finance Ordinance, 2002. The original clause read as follows: “(29) “income” includes any amount chargeable to tax under this Ordinance, any amount subject to collection of tax under Division II of Part V of Chapter X, sub-section (5) of 234 Division III of Chapter XII, and any loss of income;” 6 Inserted by Finance Act, 2003 7 The figures, commas and word “153, 154 and 156,” substituted by the Finance Act, 2005. 8 Inserted by Finance Act, 2003 1 2010 – 2011 7 The Income Tax Ordinance, 2001 loss of income but does not include, in case of a shareholder of a 1[ ] company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid up share capital;] 2 [(29A) “income year” means income year as defined in the repealed Ordinance;] 3[(29B) “Individual Pension Account” means an account maintained by an eligible person with a Pension Fund Manager approved under the Voluntary Pension System Rules, 2005;] 4[(29C) “Industrial undertaking” means – (a) an undertaking which is set up in Pakistan and which employs,- (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; and which is engaged in,(i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; or (ii) ship-building; or (iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or (iv) the working of any mine, oil-well or any other source of mineral deposits; and (b) any other industrial undertaking which the Board may by notification in the Official Gazette, specify.] (30) “intangible” means an intangible as defined in section 24; [(30A) “investment company” means an investment company as defined in the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003;] Omitted by Finance Act, 2003 Inserted by the Finance Ordinance, 2002 3 Inserted by the Finance Act, 2005. 4 Substituted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 DEFINITION OF INDUSTRIAL UNDERTAKINGS [Section 2(29C)]. Editorial nature of changes regarding formatting of paragraphs has been brought in the definition of "industrial undertakings", for correct understanding and application. The replaced text read as follows which was inserted by the Finance Act, 2005.: [(29C) “Industrial undertaking” means – (a) an undertaking which is set up in Pakistan and which employs, (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy and which is engaged in,(i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; (ii) ship-building; (iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or (iv) the working of any mine, oil-well or any other source of mineral deposits; and (b) any other industrial undertaking which the Central Board of Revenue may by notification in the official Gazette, specify;] 5 Clause (30A) substituted by the Finance Act, 2008, it was earlier inserted by the Finance Ordinance, 2002, the text read as follows: “investment company” means a company registered under the Investment Companies and Investment Advisors Rules, 1971; 1 2 2010 – 2011 8 The Income Tax Ordinance, 2001 1[(30AA) KIBOR means Karachi Interbank offered Rate prevalent on the first day of each quarter of the financial year;] 2[(30B) “leasing company” means a leasing company as defined in the Non-Banking Finance Companies and Notified Entities Regulation, 2007;] (31) “liquidation” in relation to a company, includes the termination of a trust; 3[(31A) “Local Government” shall have the same meaning as in the Punjab Local Government Ordinance, 2001 (XIII of 2001), the Sindh Local Government Ordinance, 2001 (XXVII of 2001), the NWFP Local Government Ordinance, 2001 (XIV of 2001) and the Balochistan Local Government Ordinance, 2001 (XVIII of 2001);] (32) “member” in relation to an association of persons, includes a partner in a firm; (33) “minor child” means an individual who is under the age of eighteen years at the end of a tax year; (34) “modaraba” means a modaraba as defined in the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 (XXXI of 1980); (35) “modaraba certificate” means a modaraba certificate as defined in the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 (XXXI of 1980); 4[(35A) “Mutual Fund” means a mutual fund 5[registered or approved by the Securities and Exchange Commission of Pakistan ];] 6[(35B) “non-banking finance company” means an NBFC as defined in the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003;] 7[(36) “non-profit organization” means any person other than an individual, which is – (a) established for religious, educational, charitable, welfare or development purposes, or for the promotion of an amateur sport; (b) formed and registered under any law as a non-profit organization; (c) approved by the Commissioner for specified period, on an application made by such person in the prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents as may be required by the Commissioner; and none of the assets of such person confers, or may confer, a private benefit to any other person;] (37) “non-resident person” means a non-resident person as defined in Section 81; (38) “non-resident taxpayer” means a taxpayer who is a non-resident person; EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009Definition of the term “KIBOR” has been provided to mean Karachi Interbank Offered Rate applicable on first day of each quarter of the financial year. This change was required since KIBOR is now to be used for the purpose of applying the rate of compensation on delayed refunds u/s 171 as well as the rate of additional tax u/s 205 of the Ordinance. Clause (30AA) inserted vide the Finance Act, 2009. 2 Clause (30B) substituted by the Finance Act, 2008, it was earlier inserted by the Finance Ordinance, 2002, the text read as follows: “leasing company” means a company licensed under the Leasing Companies (Establishment and Regulation) Rules, 2000; 3 Clause (31A) inserted by the Finance Act, 2008 4 Inserted by the Finance Ordinance, 2002 5 Substituted for “set up by the Investment Corporation of Pakistan or by an investment company” by Finance Act, 2003 6 Clause (35b) substituted by the Finance Act, 2008, it was earlier inserted vide Fiance act, 2004. 7 Substituted by the Finance Ordinance, 2002. The original clause read as follows: “(36) “non-profit organization” means any person – (a) established for religious, charitable or educational purposes, or for the promotion of amateur sport; (b) which is registered under any law as a non-profit organization and in respect of which the Commissioner has issued a ruling certifying that the person is a non-profit organization for the purposes of this Ordinance; and (c) none of the income or assets of the person confers, or may confer a private benefit on any other person”;. 1 2010 – 2011 9 The Income Tax Ordinance, 2001 1[(38A) “Officer of Inland Revenue” means any Additional Commissioner Inland Revenue, Deputy Commissioner Inland Revenue, Assistant Commissioner Inland Revenue, Inland Revenue Officer, Inland Revenue Audit Officer or any other officer however designated or appointed by the Board for the purposes of this Ordinance;] (39) “Originator” means Originator as defined in the Asset Backed Securitization Rules, 1999; (40) “Pakistan-source income” means Pakistan-source income as defined in section 101; 2[(40A) “Pension Fund Manager” means an asset management company registered under the NonBanking Finance Companies (Establishment and Regulations) Rules, 2003, or a life insurance company registered under Insurance Ordinance, 2000 (XXXIX of 2000), duly authorized by the Securities and Exchange Commission of Pakistan and approved under the Voluntary Pension System Rules, 2005, to manage the Approved Pension Fund;] (41) Ô “permanent establishment” in relation to a person, means a 3[fixed] place of business through which the business of the person is wholly or partly carried on, and includes – (a) a place of management, branch, office, factory or workshop, 4[premises for soliciting orders, warehouse, permanent sales exhibition or sales outlet,]other than a liaison office except where the office engages in the negotiation of contracts (other than contracts of purchase); (b) a mine, oil or gas well, quarry or any other place of extraction of natural resources; 5[(ba) an agricultural, pastoral or forestry property;] (c) a building site, a construction, assembly or installation project 6[but only where such site, project and its connected supervisory activities continue for a period or periods aggregating more than ninety days within any twelve-months period] or supervisory activities 7connected with such site or project; (d) the furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purpose 8[ ]; (e) a person acting in Pakistan on behalf of the person (hereinafter referred to as the “agent [”),] other than an agent of independent status acting in the ordinary course of business as such, if the agent – (i) has and habitually exercises an authority to conclude contracts on behalf of the other person; (ii) has no such authority, but habitually maintains a stock-in-trade or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the other person; or (f) any substantial equipment installed, or other asset or property capable of activity giving rise to income; (42) “person” means a person as defined in section 80; (43) “pre-commencement expenditure” means a pre-commencement expenditure as defined in section 25; (44) “prescribed” means prescribed by rules made under this Ordinance; Inserted vide the Finance Act, 2010. Inserted by the Finance Act, 2005. Ô IT CIRCULAR NO. 1 DATED THE 1ST JULY, 2006 DECLARES THAT THREE MONTHS ARE THE MINIMUM PERIOD REQUIREMENT FOR THE DETERMINATION OF PERMANENT ESTABLISHMENT. 3 Word inserted by the Finance Act, 2006. 4 Inserted by Finance Act, 2003 5 Inserted by Finance Act, 2003 6 Words inserted by the Finance Act, 2006. 7 vide the Finance Act, 2010. 8 Omitted by Finance Act, 2003 9 Substituted for comma by the Finance Ordinance, 2002 1 2 2010 – 2011 1[(44A) (a) 10 The Income Tax Ordinance, 2001 "Principal officer" used with reference to a company or association of persons includes— a director, a manager, secretary, agent, accountant or any similar officer; and (b) any person connected with the management or administration of the company or association of persons upon whom the Commissioner has served a notice of treating him as the principal officer thereof;] (45) “private company” means a company that is not a public company; 2 [ 3] (46) “profit on a debt” 4[whether payable or receivable, means] – (a) any profit, yield, interest, discount, premium or other amount 5[,] owing under a debt, other than a return of capital; or (b) any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility which has not been utilised; (47) “Êpublic company” means – (a) a company in which not less than fifty per cent of the shares are held by the Federal Government 6[or Provincial Government]; 7[(ab) a company in which 8[not less than fifty per cent of the] shares are held by a foreign Government, or a foreign company owned by a foreign Government9[;]] (b) a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange 10[ ] at the end of that year; or (c) 11[a unit trust whose units are widely available to the public and any other trust as defined in the Trusts Act, 1882 (II of 1882);] 12[(47A) “Real Estate Investment Trust (REIT) Scheme” means a REIT Scheme as defined in the Real Estate Investment Trust Regulations, 2008; Inserted by Finance Act, 2003 Clauses (45A) & (45B) inserted by the Finance Act, 2007. 3 Clauses (45A) and (45B) omitted by the Finance, Act, 2008, the omitted text read as below: (45A) “Private Equity and Venture Capital Fund” means a fund registered with the Securities and Exchange 53 Commission of Pakistan under the Private Equity and Venture Capital Fund Rules, 2007; (45B) “Private Equity and Venture Capital Fund Management Company” means a company licensed by the Securities and Exchange Commission of Pakistan under the Private Equity and Venture Capital Fund Rules, 2007; 4 Inserted by Finance Act, 2003 5 Comma inserted by the Finance Ordinance, 2002. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. PUBLIC COMPANY DEFINITION – FOREIGN GOVERNMENT HOLDINGS [SECTION 2(47)] Definition of “public company” was extended in 2003 to include “a company in which shares are held by a foreign government, or foreign company owned by a foreign government.” The percentage of holding was however not specified with the implication that even a nominal percentage of such share holdings would entitle a company to the tax benefits available to a public company. Subclause (ab) of clause (47) of section 2 has been amended and the condition of at least 50% share holdings by a foreign Government (or a foreign company owned by a foreign Government) has been inserted. This will bring parity vis-a-vis companies in which the Federal or the Provincial Governments hold shares. 6 Inserted Finance Act, 2003 7 Inserted by Finance Act, 2003 8 Inserted by the Finance Act, 2005. 9 The full stop substituted by the Finance Act, 2005. 10 The words “and was on the Central Depository System,” omitted by the Finance Ordinance, 2002 11 Substituted for “a unit trust whose units are widely available to the public and any other public trust;” by Finance Act, 2003. 12 Clauses 47A & 47B substituted by the Finance Act, 2008, earlier it was added by the Finance Act, 2006, the old clauses read as follows: (47A) ÂReal Estate Investment Trust (REIT)” means a scheme which consists of a closed-end collective investment scheme constituted as a unit trust fund and managed by a REIT management company for the purposes of investment in real estate, approved and authorized by the Security and Exchange Commission of Pakistan under the Real Estate Investment Trust Rules, 2006; 1 2 Â Income Tax Cir. No. 1 dated the 1st July, 2006 EXEMPTION FROM INCOME TAX – REAL ESTATE INVESTMENT TRUST (REIT) [Section 2(47A)] 2010 – 2011 11 The Income Tax Ordinance, 2001 (47B) “Real Estate Investment Trust Management Company (REITMC)” means REITMC as defined under the Real Estate Investment Trust Regulations, 2008;] (48) “recognised provident fund” means a provident fund recognised by the Commissioner in accordance with Part I of the Sixth Schedule; 1[(48A)] (49) “rent” means rent as defined in sub-section (2) of section 15 and includes an amount treated as rent under section 16; 2[(49A) “repealed Ordinance” means Income Tax Ordinance, 1979 (XXXI of 1979);] (50) “resident company” means a resident company as defined in section 83; (51) “resident individual means a resident individual as defined in section 82; (52) “resident person” means a resident person as defined in section 81; (53) “resident taxpayer” means a taxpayer who is a resident person; (54) 3[“royalty”] means any amount paid or payable, however described or computed, whether periodical or a lump sum, as consideration for (a) the use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other like property or right; (b) the use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for use in connection with television or tapes in connection with radio broadcasting, but shall not include consideration for the sale, distribution or exhibition of cinematograph films; (c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber or similar technology in connection with television, radio or internet broadcasting; (d) the supply of any technical, industrial, commercial or scientific knowledge, experience or skill; (e) the use of or right to use any industrial, commercial or scientific equipment; REIT is a security that sells like a stock and invests in real estate directly or indirectly. REIT has been provided exemptions from the applicability of different provisions of the Income Tax Ordinance, 2001, subject to condition that not less than 90% of its accounting income of that year, (as reduced by capital gains whether realized or unrealized) is distributing among the unit or certificate holders or shareholders as the case may be. Consequent to above amendments, the following expressions have been defined in section 2 of the Ordinance and exemptions have been provided as below:Description Under Clause (i) Real Estate Investment Trust (REIT) (47A) (ii) Real Estate Investment Trust Management Company (47B) (iii) Exemption to income (99) Part I of Second Schedule (iv) Exemption to instrument of redeemable capital (57) Part I of Second Schedule Under Clause (v) Exemption from applicability of provision of; Part IV of Second Schedule Section (11) (a) 113 (minimum tax) (33) (b) 151 (Profit on debt) and 233 (Brokerage and Commission) (47B) (c) 150 (Dividends) (47B) “Real Estate Investment Trust Management Company” means a company licensed by the Security and Exchange Commission of Pakistan under the Real Estate Investment Trust Rules, 2006;] 1 Clause (41) omitted vide the Finance Act, 2010 and was inserted by the Finance Ordinance, 2002 as follows: “Regional Commissioner” means a person appointed as a Regional Commissioner of Income Tax under section 208 and includes a Director-General of Income Tax and Sales Tax; 2 Inserted by the Finance Ordinance, 2002 3 Substituted for the word “royalties” by the Finance Ordinance, 2002. 2010 – 2011 12 The Income Tax Ordinance, 2001 (f) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as mentioned in 1[sub-clauses] (a) through (e); 2[and] (g) the disposal of any property or right referred to in 3[sub-clauses] (a) through (e); (55) “salary” means salary as defined in section 12; (56) “Schedule” means a Schedule to this Ordinance; (57) “securitization” means securitization as defined in the Asset Backed Securitization Rules, 1999; (58) “share” in relation to a company, includes a modaraba certificate and the interest of a beneficiary in a trust (including units in a trust); (59) “shareholder” in relation to a company, includes a modaraba certificate holder, 4[a unit holder of a unit trust] and a beneficiary of a trust; “Ê Small Company” means a company registered on or after the first day of July, 2005, under the Companies Ordinance, 1984 (XLVII) of 1984, which,- 5[(59A) (i) has paid up capital plus undistributed reserves not exceeding twenty-five million rupees; 6[(ia) has employees not exceeding two hundred and fifty any time during the year;] (ii) has annual turnover not exceeding two hundred 7[and fifty] million rupees; and (iii) is not formed by the splitting up or the reconstitution of business already in existence;] (60) “Special Purpose Vehicle” means a Special Purpose Vehicle as defined in the Asset Backed Securitization Rules, 1999; (61) “speculation business” means a speculation business as defined in section 19; (62) “stock-in-trade” means stock-in-trade as defined in section 35; (63) “tax” means any tax imposed under Chapter II, and includes any penalty, fee or other charge or any sum or amount leviable or payable under this Ordinance; (64) “taxable income” means taxable income as defined in section 9; Substituted for the word “clauses” by the Finance Ordinance, 2002. Added by the Finance Act, 2005. 3 Substituted for the “clauses” by the Finance Ordinance, 2002 4 Inserted for “, a unit holder of a unit trust” by the Finance Ordinance, 2002 5 Inserted by the Finance Act, 2005. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. REDEFINING “SMALL COMPANY”. [Section 2(59A)] The concept of “small company” was introduced through Finance Act, 2005 with incentives of reduced corporate tax rate of 20% and absolving it to withhold tax under section 153 of the Income Tax Ordinance. This expression has been redefined with following parameters: (i) paid up capital upto Rs. 25 million; (ii) the threshold of maximum turnover has been raised to Rs.250(m); and (iii) employees limit not exceeding 250 persons at any time during the year EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. TAXATION OF SMALL COMPANIES. [SECTION 2(59A)] In order to encourage the small enterprises sector and to incentivize its corporatization, a concessional tax regime for small companies has been introduced. The newly inserted section 2(59A) defines “small company” as a company registered on or after the first day of July, 2005, which has not been formed by splitting up or reconstitution of a company already in existence, having a paid up capital plus undistributed reserves not exceeding Rs. 25 million and turnover upto Rs.200 million. Companies meeting the criteria shall enjoy a special corporate tax rate of 20% which shall be applicable from tax year 2006 and onwards. At the same time, these companies have been exempted from the obligation to act as a withholding agent and from payment of minimum tax under section 113. 6 Paragraph inserted by the Finance Act, 2007. 7 Words inserted by the Finance Act, 2007. 1 2 2010 – 2011 13 The Income Tax Ordinance, 2001 1[(65)] (66) “taxpayer” means any person who derives an amount chargeable to tax under this Ordinance, and includes – (a) any representative of a person who derives an amount chargeable to tax under this Ordinance; (b) any person who is required to deduct or collect tax under Part V of Chapter X 2[and Chapter XII;] or (c) any person required to furnish a return of income or pay tax under this Ordinance; (67) “tax treaty” means an agreement referred to in section 107; (68) “tax year” means the tax year as defined in sub-section (1) of section 74 and, in relation to a person, includes a special year or a transitional year that the person is permitted to use under section 74; (69) “total income” means total income as defined in section 10; (70) “trust” means a “trust” as defined in section 80; 3[(70A) “turnover” means turnover as defined in sub-section (3) of section 113;] (71) “underlying ownership” means an underlying ownership as defined in section 98; (72) “units” means units in a unit trust; (73) “unit trust” means a unit trust as defined in section 80; and 4[(74) “Venture Capital Company” and “Venture Capital Fund” shall have the same meanings as are assigned to them under the 5[Non-Banking Finance 6[Companies] (Establishment and Regulation) Rules, 2003];] 3. Ordinance to override other laws.- The provisions of this Ordinance shall apply notwithstanding anything to the contrary contained in any other law for the time being in force. 1 Omitted vide the Finance Act, 2010, the omitted text read as follows: “taxation officer” means any 1[Additional Commissioner of Income Tax, Deputy Commissioner of Income Tax,] Assistant Commissioner of Income Tax, Income Tax Officer, Special Officer or any other officer however designated appointed by the Central Board of Revenue for the purposes of this Ordinance; 1 Substituted for the words and comma “Deputy Commissioner of Income Tax, Additional Commissioner of Income Tax” by the Finance Ordinance, 2002 2 Inserted by the Finance Ordinance, 2002 3 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009Previously the term “turnover” had been defined in section 113 of the Ordinance which was deleted through Finance Act, 2008. Consequently, the provisions of law (e.g. section 113A) where turnover was defined by reference to definition of turnover in section 113 became meaningless. Moreover in certain sections such as 113B, turnover was not defined. Through Finance Act, 2009, the term turnover has been defined in section 2 of the Ordinance which will be applicable to the whole of the Ordinance. Clause (70A) inserted vide the Finance Act, 2009. 4 Added by Finance Ordinance, 2002 5 Substituted for “Venture Capital Company and Venture Capital Funds Rules, 2001” by Finance Act, 2004. 6 The word “Company” substituted by the Finance Act, 2005. 2010 – 2011 14 The Income Tax Ordinance, 2001 CHAPTER II CHARGE OF TAX 4. Tax on taxable income.- (1) Subject to this Ordinance, income tax shall be imposed for each tax year, at the rate or rates specified in 1[Division I, IB or II] of Part I of the First Schedule, as the case may be, on every person who has taxable income for the year. (2) The income tax payable by a taxpayer for a tax year shall be computed by applying the rate or rates of tax applicable to the taxpayer under this Ordinance to the taxable income of the taxpayer for the year, and from the resulting amount shall be subtracted any tax credits allowed to the taxpayer for the year. (3) Where a taxpayer is allowed more than one tax credit for a tax year, the credits shall be applied in the following order – (a) any foreign tax credit allowed under section 103; then (b) any tax credit allowed under Part X of Chapter III; and then (c) any tax credit allowed under sections 2[ ]147 and 168. (4) Certain classes of income (including the income of certain classes of persons) may be subject to – (a) separate taxation as provided in sections 5, 6 and 7; or (b) collection of tax under Division II of Part V of Chapter X or deduction of tax under Division III of Part V of Chapter X as a final tax on the income 3[of] the person. (5) Income referred to in sub-section (4) shall be subject to tax as provided for in section 5, 6 or 7, or Part V of Chapter X, as the case may be, and shall not be included in the computation of taxable income in accordance with section 8 or 169, as the case may be. 4[(6) Where, by virtue of any provision of this Ordinance, income tax is to be deducted at source or collected or paid in advance, it shall, as the case may be, be so deducted, collected or paid, accordingly5[.]] 5. Tax on dividends.- (1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a 6[ ]company 7[or 7[or treated as dividend under clause (19) of section 2]. (2) The tax imposed under sub-section (1) on a person who receives a dividend shall be computed by applying the relevant rate of tax to the gross amount of the dividend. (3) This section shall not apply to a dividend that is exempt from tax under this Ordinance. 6. Tax on certain payments to non-residents.- (1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IV of Part I of the First Schedule, on every non-resident person who receives any Pakistan-source royalty or fee for technical services. (2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying the relevant rate of tax to the gross amount of the royalty or fee for technical services. (3) This section shall not apply to – Substituted for “Division I or II” vide the Finance Act, 2010 “140” Omitted by Finance Act, 2003 3 Substituted for “or” vide the Finance Act, 2010 4 Sub-section (6) inserted by Finance Act, 2003 5 The semicolon substituted by the Finance Act, 2005. 6 Word “resident” omitted by Finance Act, 2003 7 Added vide the Finance Act, 2009. 1 2 2010 – 2011 15 The Income Tax Ordinance, 2001 (a) any royalty where the property or right giving rise to the royalty is effectively connected with a permanent establishment in Pakistan of the non-resident person; (b) any fee for technical services where the services giving rise to the fee are rendered through a permanent establishment in Pakistan of the non-resident person; or (c) any royalty or fee for technical services that is exempt from tax under this Ordinance. (4) Any Pakistani-source royalty or fee for technical services received by a non-resident person to which this section does not apply by virtue of clause (a) or (b) of sub-section (3) shall be treated as income from business attributable to the permanent establishment in Pakistan of the person. 7. Tax on shipping and air transport income of a non-resident person.- (1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division V of Part I of the First Schedule, on every nonresident person carrying on the business of operating ships or aircraft as the owner or charterer thereof in respect of – (a) the gross amount received or receivable (whether in or out of Pakistan) for the carriage of passengers, livestock, mail or goods embarked in Pakistan; and (b) the gross amount received or receivable in Pakistan for the carriage of passengers, livestock, mail or goods embarked outside Pakistan. (2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying the relevant rate of tax to the gross amount referred to in sub-section (1). (3) This section shall not apply to any amounts exempt from tax under this Ordinance. 8. General provisions relating to taxes imposed under sections 5, 6 and 7.- Subject to this Ordinance, the tax imposed under Sections 5, 6 and 7 shall be a final tax on the amount in respect of which the tax is imposed and(a) such amount shall not be chargeable to tax under any head of income in computing the taxable income of the person who derives it for any tax year; (b) no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the amount; (c) the amount shall not be reduced by – (i) any deductible allowance; or (ii) the set off of any loss; (d) the tax payable by a person under sections 5, 6 or 7 shall not be reduced by any tax credits allowed under this Ordinance; and (e) the liability of a person under sections 5, 6 or 7 shall be discharged to the extent that – (i) in the case of shipping and air transport income, the tax has been paid in accordance with section 143 or 144, as the case may be; or (ii) in any other case, the tax payable has been deducted at source under Division III of Part V of Chapter X1[; Provided that the provision of this section shall not apply to dividend received by a company.] 1 Colon substituted for full stop and proviso inserted by the Finance Act, 2007. 2010 – 2011 16 The Income Tax Ordinance, 2001 CHAPTER III TAX ON TAXABLE INCOME PART I COMPUTATION OF TAXABLE INCOME 9. Taxable income.- The taxable income of a person for a tax year shall be the total income of the person for the year reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person for the year. 10. Total Income.- The total income of a person for a tax year shall be the sum of the person’s income under each of the heads of income for the year. 11. Heads of income.- (1) For the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely:– (a) Salary; 1[(b) Income from Property; (c) Income from Business; (d) Capital Gains; and (e) Income from Other Sources.] (2) Subject to this Ordinance, the income of a person under a head of income for a tax year shall be the total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions, if any, allowed under this Ordinance to the person for the year under that head. (3) Subject to this Ordinance, where the total deductions allowed under this Ordinance to a person for a tax year under a head of income exceed the total of the amounts derived by the person in that year that are chargeable to tax under that head, the person shall be treated as sustaining a loss for that head for that year of an amount equal to the excess. (4) A loss for a head of income for a tax year shall be dealt with in accordance with Part VIII of this Chapter. (5) The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income. (6) The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income. Substituted for “(b) income from property; (c) income from business; (d) capital gains; and (e) income from other sources.” by the Finance Ordinance, 2002. 1 2010 – 2011 17 The Income Tax Ordinance, 2001 PART II HEAD OF INCOME: SALARY Ô 12. Salary.- (1) Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”. (2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including (a) any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions) 1[: Provided that any bonus paid or payable to corporate employees receiving salary income of one million rupees or more (excluding bonus) in tax year 2010, shall be chargeable to tax at the rate provided in paragraph (2) of Division I of Part I of the First Schedule;] (b) any perquisite, whether convertible to money or not; (c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment; (d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment; (e) the amount of any profits in lieu of, or in addition to, salary or wages, including any amount received – (i) as consideration for a person’s agreement to enter into an employment relationship; (ii) as consideration for an employee’s agreement to any conditions of employment or any changes to the employee’s conditions of employment; (iii) on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments; (iv) from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction; and (v) as consideration for an employee’s agreement to a restrictive covenant in respect of any past, present or prospective employment; (f) any pension or annuity, or any supplement to a pension or annuity; and (g) any amount chargeable to tax as “Salary” under section 14. (3) Where an employer agrees to pay the tax chargeable on an employee’s salary, the amount of the employee’s income chargeable under the head “Salary” shall be grossed up by the amount of tax payable by the employer. (4) No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”. Ô 1 PLEASE REFER IT CIR. NO. 3 OF 2005 DATED THE 11TH JULY, 2006 & IT Cir. No. 6 of 2008 AT ANNEXURE Colon substituted for semi-colon and proviso inserted vide the Finance Act, 2009. 2010 – 2011 The Income Tax Ordinance, 2001 18 (5) For the purposes of this Ordinance, an amount or perquisite shall be treated as received by an employee from any employment regardless of whether the amount or perquisite is paid or provided – (a) by the employee’s employer, an associate of the employer, or by a third party under an arrangement with the employer or an associate of the employer; (b) by a past employer or a prospective employer; or (c) to the employee or to an associate of the employee employee or an associate of the employee.] [or to a third party under and agreement with the (6) An employee who has received an amount referred to in sub-clause (iii) of clause (e) of subsection (2) in a tax year may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula, namely:– A/B% where – A is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years; and B is the employee’s total taxable income for the three preceding tax years. (7) Where – (a) any amount chargeable under the head “Salary” is paid to an employee in arrears; and (b) as a result the employee is chargeable at higher rates of tax than would have been applicable if the amount had been paid to the employee in the tax year in which the services were rendered, the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates of tax that would have been applicable if the salary had been paid to the employee in the tax year in which the services were rendered. (8) An election under sub-section (6) or (7) shall be made by the due date for furnishing the employee’s return of income or employer certificate, as the case may be, for the tax year in which the amount was received or by such later date as the Commissioner may allow. 13. Value of perquisites.- (1) For the purposes of computing the income of an employee for a tax year chargeable to tax under the head “Salary”, the value of any perquisite provided by an employer to the employee in that year that is included in the employee’s salary under section 12 shall be determined in accordance with this section. (2) This section shall not apply to any amount referred to in clause (c) or (d) of sub-section (2) of section 12. 2[(3) Where, in a tax year, a motor vehicle is provided by an employer to an employee wholly or partly for the private use of the employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include an amount computed as may be prescribed.] Added by the Finance Ordinance, 2002 The original clause read as under: “ (3) Subject to sub-section (4), where, in a tax year, a motor vehicle is provided by an employer to an employee wholly or partly for the private use of the employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount computed in accordance with the following formula, namely:– (A x B) – C where, A is the cost to the employer of acquiring the motor vehicle or, if the vehicle is leased by the employer, the fair market value of the vehicle at the commencement of the lease; B is – (a) where the vehicle is wholly for private use, fifteen per cent; (b) where the vehicle is only partly for private use, seven and a half per cent; and 1 2 2010 – 2011 1 19 The Income Tax Ordinance, 2001 [ ] (5) Where, in a tax year, the services of a housekeeper, driver, gardener or other domestic assistant is provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the total salary paid to the domestic assistant 2[such house keeper, driver, gardener or other domestic assistant] in that year for services rendered to the employee, as reduced by any payment made 3[to the employer] for such services. (6) Where, in a tax year, utilities are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the utilities provided, as reduced by any payment made by the employee for the utilities. [(7) Where a loan is made, on or after the 1st day of July, 2002, by an employer to an employee and either no profit on loan is payable by the employee or the rate of profit on loan is less than the benchmark rate, the amount chargeable to tax to the employee under the head “Salary” for a tax year shall include an amount equal to4 (a) the profit on loan computed at the benchmark rate, where no profit on loan is payable by the employee, or (b) the difference between the amount of profit on loan paid by the employee in that tax year and the amount of profit on loan computed at the benchmark rate, as the case may be] 5[: Provided that this sub-section shall not apply to such benefit arising to an employee due to waiver of interest by such employee on his account with the employer.] (8) For the purposes of this Ordinance not including sub-section (7), where the employee uses a loan referred to in sub-section (7) wholly or partly for the acquisition of 6[any asset or property] producing income chargeable to tax under any head of income, the employee shall be treated as having paid an amount as profit equal to the benchmark rate on the loan or that part of the loan used to acquire the [asset or property.] (9) Where, in a tax year, an obligation of an employee to pay or repay an amount owing by the employee to the employer is waived by the employer, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount so waived. (10) Where, in a tax year, an obligation of an employee to pay or repay an amount [owing] by the employee to another person is paid by the employer, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount so paid. C is any payment made by the employee for the use of the motor vehicle or for its running costs.” Omitted by the Finance Ordinance, 2002. The omitted sub-section (4) read as follows: “(4) Where a motor vehicle referred to in sub-section (3) is available to more than one employee for a tax year, the amount chargeable to tax under the head “Salary” for each such employee for that year shall be the amount determined under sub-section (3) divided by the number of employees permitted to use the vehicle.” 2 Substituted for “domestic assistant” by the Finance Ordinance, 2002 3 Substituted for “by the employee” by the Finance Ordinance, 2002 4 Substituted for “sub-section (7)” by the Finance Ordinance, 2002. The original sub-section (7) read as follows: “(7) Where, in a tax year, a loan is made by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the difference between the profit paid by the employee on the loan in the tax year, if any, and the profit which would have been paid by the employee on the loan for the year if the loan had been made at the benchmark rate for that year. 5 Colon substituted for full-stop and proviso inserted by the Finance Act, 2010 INCOME TAX Circular No. 10 dated the the July 16, 2010 TAXABILITY OF INTEREST FREE/CONCESSIONAL LOANS [Section 13(7)] Sub-section (7) of section 13 provides for taxation of benefit arising on free or concessional loan in the hands of an employee. A proviso has now been added under this section whereby such benefit shall not be taxable in the hands of an employee in cases where such benefit is extended by the employer due to the waiver of interest by such employee on his accounts (e.g. provident fund etc) maintained with the employer. 6 Substituted for the word “property” by the Finance Ordinance, 2002 7 Substituted for the word “property” by the Finance Ordinance, 2002 8 Substituted for the word “owed” by the Finance Ordinance, 2002 1 2010 – 2011 20 The Income Tax Ordinance, 2001 (11) Where, in a tax year, property is transferred or services are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the property or services determined at the time the property is transferred or the services are provided, as reduced by any payment made by the employee for the property or services. [(12) Where, in the tax year, accommodation or housing is provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary" for that year shall include an amount computed as may be prescribed.] (13) Where, in a tax year, an employer has provided an employee with a perquisite which is not covered by sub-sections (3) through (12), the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the perquisite, [except where the rules, if any, provide otherwise,] determined at the time it is provided, as reduced by any payment made by the employee for the perquisite. [(14) In this section,(a) “benchmark rate” means -(i) for the tax year commencing on the first day of July, 2002, a rate of five percent per annum; and (ii) for the tax years next following the tax year referred to in sub-clause (I), the rate for each successive year taken at one percent above the rate applicable for the immediately preceding tax year, but not exceeding such rate, if any, as the Federal Government may, by notification, specify in respect of any tax year; (b) “services” includes the provision of any facility; and (c) “utilities” includes electricity, gas, water and telephone.] 14. Employee share schemes.- (1) The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax. (2) Subject to sub-section (3), where, in a tax year, an employee is issued with shares under an employee share scheme including as a result of the exercise of an option or right to acquire the shares, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares. (3) Where shares issued to an employee under an employee share scheme are subject to a restriction on the transfer of the shares (a) no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier of – (i) the time the employee has a free right to transfer the shares; or 1 Substituted by Finance Ordinance, 2002. The original sub-section (12) read as follows: “(12) Where, in a tax year, accommodation or housing is provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include – (a) where the employer or an associate owns the accommodation or housing, the fair market rent of the accommodation or housing; or (b) in any other case, the rent paid by the employer for the accommodation or housing, as reduced by any payment made by the employee for the accommodation or housing.” 2 Inserted by the Finance Ordinance, 2002 3 Substituted by the Finance Ordinance, 2002. The original sub-section (14) read as follows: “(14)In this section, “benchmark rate” means the State Bank of Pakistan discount rate at the commencement of the tax year; “services” includes the making available of any facility; and “utilities” includes electricity, gas, water and telephone.” 2010 – 2011 21 The Income Tax Ordinance, 2001 the time the employee disposes of the shares; and (b) the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the employee has a free right to transfer the shares or disposes of the shares, as the case may be, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares. (4) For purposes of this Ordinance, where sub-section (2) or (3) applies, the cost of the shares to the employee shall be the sum of – (a) the consideration, if any, given by the employee for the shares; (b) the consideration, if any, given by the employee for the grant of any right or option to acquire the shares; and (c) the amount chargeable to tax under the head “Salary” under those sub-sections. (5) Where, in a tax year, an employee disposes of a right or option to acquire shares under an employee share scheme, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount of any gain made on the disposal computed in accordance with the following formula, namely:– A-B where – A is the consideration received for the disposal of the right or option; and B is the employee’s cost in respect of the right or option. (6) In this sub-section, “employee share scheme” means any agreement or arrangement under which a company may issue shares in the company to – (a) an employee of the company or an employee of an associated company; or (b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company. PART III HEAD OF INCOME: INCOME FROM PROPERTY 15. Income from property.- (1) The rent received or receivable by a person 1[for]a tax year, other than rent exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Income from Property”. (2) Subject to sub-section (3), “rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building. (3) This section shall not apply to any rent received or receivable by any person in respect of the lease of a building together with plant and machinery and such rent shall be chargeable to tax under the head “Income from Other Sources”. (3A) 1Where any amount is included in rent received or receivable by any person for the provision of amenities, utilities or any other service connected with the renting of the building, such amount shall be chargeable to tax under the head “Income from Other Sources.] 1 Substituted for “in” by Finance Act, 2003 2010 – 2011 22 The Income Tax Ordinance, 2001 (4) Subject to sub-section (5), where the rent received or receivable by a person is less than the fair market rent for the property, the person shall be treated as having derived the fair market rent for the period the property is let on rent in the tax year. (5) Sub-section (4) shall not apply where the fair market rent is included in the income of the lessee chargeable to tax under the head “Salary”. 2[Â(6) Income under this section shall be liable to tax at the rate specified in Division VI of Part I of the First Schedule. (7) the provisions of sub-section (1), shall not apply in respect of a taxpayer who— (i) is an individual or association of persons; (ii) derives income chargeable to tax under this section not exceeding Rs. 150,000 in a tax year; and (iii) does not derive taxable income under any other head.] 16. Non-adjustable amounts received in relation to buildings.- (1) Where the owner of a building receives from a tenant an amount which is not adjustable against the rent payable by the tenant, the amount shall be treated as rent chargeable to tax under the head “Income from Property” in the tax year in which it was received and the following nine tax years in equal proportion. (2) Where an amount (hereinafter referred to as the “earlier amount”) referred to in sub-section (1) is refunded by the owner to the tenant on termination of the tenancy before the expiry of ten years, no portion of the amount shall be allocated to the tax year in which it is refunded or to any subsequent tax year except as provided for in sub-section (3). (3) Where the circumstances specified in sub-section (2) occur and the owner lets out the building or part thereof to another person (hereinafter referred to as the “succeeding tenant”) and receives from the succeeding tenant any amount (hereinafter referred to as the “succeeding amount”) which is not adjustable against the rent payable by the succeeding tenant, the succeeding amount as reduced by such portion of the earlier amount as was charged to tax shall be treated as rent chargeable to tax under the head “Income from Property” as specified in sub-section (1). 17. [4] Sub-section (3A) inserted by Finance Act, 2003 Sub-sections 6 & 7 added by the Finance Act, 2006. Â Income Tax Cir. No. 1 dated the 1st July, 2006 FIXED TAX ON INCOME FROM PROPERTY [Section 15 (6)] Upto tax year 2006, income from property was subject to withholding tax @ 5% if the annual rent exceeded Rs. 300,000/-. The monetary limit for deduction of tax has been removed. This provision was applicable only if the payer of rent was the Federal Government, a Provincial Government, Local Authority, a company, a non-profit organization or a diplomatic mission. Now, CBR has also been empowered to designate any person as withholding agent in this behalf. In order to broaden the tax base and at the same time to facilitate the taxpayer, amendment in law has been made and fixed tax @ 5% on gross amount of rent chargeable to tax under section 15 read with section 16 of the Income Tax Ordinance, 2001 has been made applicable w.e.f. July 1, 2006. However, the provision of sub-section (1) of section 15 shall not apply in respect of a taxpayer who – (i) is an individual or association of persons; (ii) derives income chargeable to tax under section 15 not exceeding Rs.150,000/- in a tax year; and (iii) does not derive taxable income under any other head. 4 Section omitted by the Finance Act, 2006. The omitted section read as follows: 17. Deductions in computing income chargeable under the head “Income from Property”.- (1) In computing the income of a person chargeable to tax under the head “Income from Property” for a tax year, a deduction shall be allowed for the following expenditures or allowances, namely:– (a) In respect of repairs to a building, an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year, computed before any deduction allowed under this section; (b) any premium paid or payable by the person in the year to insure the building against the risk of damage or destruction; (c) any local rate, tax, charge, or cess in respect of the property or the rent from the property paid or payable by the person to any local authority or government in the year, not being any tax payable under this Ordinance; (d) any ground rent paid or payable by the person in the year in respect of the property; (e) any profit paid or payable by the person in the year on any money borrowed including by way of mortgage, to acquire, construct, renovate, extend, or reconstruct the property; 1 2 2010 – 2011 23 The Income Tax Ordinance, 2001 PART IV HEAD OF INCOME: INCOME FROM BUSINESS Division I Income from Business 18. Income from business.- (1) The following incomes of a person for a tax year, other than income exempt from tax under this Ordinance, shall be chargeable to tax under the head “Income from Business” – (a) the profits and gains of any business carried on by a person at any time in the year; (b) any income derived by any trade, professional or similar association from the sale of goods or provision of services to its members; (c) any income from the hire or lease of tangible movable property; (d) the fair market value of any benefit or perquisite, whether convertible into money or not, derived by a person in the course of, or by virtue of, a past, present, or prospective business relationship; and (e) any management fee derived by a management company (including a modaraba 1[management company).] (2) Any profit on debt derived by a person where the person’s business is to derive such income shall be chargeable to tax under the head “Income from Business” and not under the head “Income from Other Sources”. 2[(3) Where a lessor, being a scheduled bank or an investment bank or a development finance institution or a modaraba or a leasing company has leased out any asset, whether owned by it or not, to (f) where the property has been acquired, constructed, renovated, extended, or reconstructed by the person with capital contributed by the House Building Finance Corporation or a scheduled bank under a scheme of investment in property on the basis of sharing the rent made by the Corporation or bank, the share in rent 4[and share towards appreciation in the value of property] (excluding the return of capital, if any) from the property paid or payable by the person to the said Corporation or the bank in the year under that scheme; 2[(fa) where the property is subject to mortgage or other capital charge, the amount of profit or interest paid on such mortgage or charge;] (g) any expenditure (not exceeding six per cent of the rent chargeable to tax in respect of the property for the year computed before any deduction allowed under this section) paid or payable by the person in the year for the purpose of collecting the rent due in respect of the property; (h) any expenditure paid or payable by the person in the tax year for legal services acquired to defend the person’s title to the property or any suit connected with the property in a Court; and (i) where there are reasonable grounds for believing that any unpaid rent in respect of the property is irrecoverable, an allowance equal to the unpaid rent where – (i) the tenancy was bona fide, the defaulting tenant has vacated the property or steps have been taken to compel the tenant to vacate the property, and the defaulting tenant is not in occupation of any other property of the person; (ii) the person has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or has reasonable grounds to believe that legal proceedings would be useless; and (iii) the unpaid rent has been included in the income of the person chargeable to tax under the head “Income from Property” for the tax year in which the rent was due and tax has been duly paid on such income. (2) Where any unpaid rent allowed as a deduction under clause (i) of sub-section (1) is wholly or partly recovered, the amount recovered shall be chargeable to tax in the tax year in which it is recovered. (3) Where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to tax under the head “Income from Property” and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head “Income from Property” in the first tax year following the end of the three years. (4) Where an unpaid liability is chargeable to tax as a result of the application of sub-section (3) and the person subsequently pays the liability or a part of the liability, the person shall be allowed a deduction for the amount paid in the tax year in which the payment is made. (5) Any expenditure allowed to a person under this section as a deduction shall not be allowed as a deduction in computing the income of the person chargeable to tax under any other head of income. (6) The provisions of section 21 shall apply in determining the deductions allowed to a person under this section in the same manner as they apply in determining the deductions allowed in computing the income of a person chargeable to tax under the head “Income from Business”. 4 Inserted by the Finance Ordinance, 2002 2 Clause (fa) inserted by Finance Act, 2003 1 Added by the Finance Ordinance, 2002 2 Sub-sections (3) and (4) inserted Finance Act, 2003 2010 – 2011 24 The Income Tax Ordinance, 2001 another person, any amount paid or payable by the said person in connection with the lease of said asset shall be treated as the income of the said lessor and shall be chargeable to tax under the head “Income from Business. (4) Any amount received by a banking company or a non-banking finance company, where such amount represents distribution by a mutual fund 1[or a Private Equity and Venture Capital Fund] out of its income from profit on debt, shall be chargeable to tax under the head "Income from Business" and not under the head "Income from Other Sources."] 19. Speculation business.- (1) Where a person carries on a speculation business – (a) that business shall be treated as distinct and separate from any other business carried on 2[by] the person; (b) this Part shall apply separately to the speculation business and the other business of the person; (c) section 67 shall apply as if the profits and gains arising from a speculation business were a separate head of income; (d) any profits and gains arising from the speculation business for a tax year computed in accordance with this Part shall be included in the person’s income chargeable to tax under the head “Income from Business” for that year; and (e) any loss of the person arising from the speculation business sustained for a tax year computed in accordance with this Part shall be dealt with under section 58. (2) In this section, “speculation business” means any business in which a contract for the purchase and sale of any commodity (including 3[stocks] and shares) is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity, but does not include a business in which – (a) a contract in respect of raw materials or merchandise is entered into by a person in the course of a manufacturing or mercantile business to guard against loss through future price fluctuations for the purpose of fulfilling the person’s other contracts for the actual delivery of the goods to be manufactured or merchandise to be sold; (b) a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss in the person’s holding of stocks and shares through price fluctuations; or (c) a contract is entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing 4[arbitrage] to guard against any loss which may arise in the ordinary course of the person’s business as such member. Words inserted by the Finance Act, 2007. Inserted by the Finance Ordinance, 2002 3 The word “stock” substituted by the Finance Act, 2005. 4 The word “arbitrate” substituted by the Finance Act, 2005. 1 2 2010 – 2011 25 The Income Tax Ordinance, 2001 Division II Deductions: General Principles 20. Deductions in computing income chargeable under the head “Income from Business”.- (1) Subject to this Ordinance, in computing the income of a person chargeable to tax under the head “Income from Business” for a tax year, a deduction shall be allowed for any expenditure incurred by the person in the year 1[wholly and exclusively for the purposes of business]. 2[(1A) Subject to this Ordinance, where animals which have been used for the purposes of the business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the taxpayer of the animals and the amount, if any, realized in respect of the carcasses or animals.] (2) Subject to this Ordinance, where the expenditure referred to in sub-section (1) is incurred in acquiring a depreciable asset or an intangible with a useful life of more than one year or is pre-commencement expenditure, the person must depreciate or amortise the expenditure in accordance with sections 22, 23, 24 and 25. 3[(3) Subject to this Ordinance, where any expenditure is incurred by an amalgamated company on legal and financial advisory services and other administrative cost relating to planning and implementation of amalgamation, a deduction shall be allowed for such expenditure.] 21. Deductions not allowed.- Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head “Income from Business” for (a) any cess, rate or tax paid or payable by the person in Pakistan or a foreign country that is levied on the profits or gains of the business or assessed as a percentage or otherwise on the basis of such profits or gains; 1 Substituted for the words “to the extent the expenditure is incurred in deriving income from business chargeable to tax” by the Finance Act, 2004. 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAXATION OF BONUS PAID TO CORPORATE EMPLOYEES. [Section 12 – First Schedule] A proviso has been inserted in Clause (a) of sub-section (2) of section 20 whereby any bonus paid or payable to a corporate employee receiving salary income of Rs. One million or more (excluding bonus) shall be chargeable to tax at the rate of 30%. This is a one time levy and payable for the tax year 2010 only, so as to support the internally Displaced People (IDPs) for their rehabilitation. Example-1—where salary excluding bonus is above 1 million Salary income of a corporate employee in tax year 2010 Rs.1,300,000 (including bonus of Rs.300,000) Working of Tax Salary income other than bonus Rs.1,000,000 Rs.90,000 (A)Tax thereon @ 9% Bonus income for the year Rs.300,000 Rs.90,000 (B)Tax thereon @ 30% Total Tax (A+B) Rs.180,000 Example-2—where salary excluding bonus is below 1 million Salary income of a corporate employee in tax year 2010 Rs.1,000,000 (including bonus of Rs.100,000) Working of Tax Salary income other than bonus Rs. 900,000 Bonus Rs. 100,000 Salary income including bonus Rs. 10,00,000 Rs.90,000 Tax thereon @ 9% DEDUCTIONS IN COMPUTING BUSINESS INCOME. [Section 20(1A)] A new sub-section (1A)has been inserted in section 20 to allow deduction to a person using animals for the purpose of the business or profession otherwise than as stock-in-trade where such animals have died or become permanently useless for such purposes. The amount of deduction to be allowed is not to exceed the difference between the actual cost of the animals and the amount, if any, realized in respect of the carcasses of animals. The amendment has been made to encourage dairy farming businesses which has become very attractive venture for the corporate sectors and will help in boosting foreign direct investment in the country. Sub-section (1A) inserted vide the Finance Act, 2009. 3 Added by the Finance Ordinance, 2002 2010 – 2011 26 The Income Tax Ordinance, 2001 (b) any amount of tax deducted under Division III of Part V of Chapter X from an amount derived by the person; (c) any salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee paid by the person from which the person is required to deduct tax under Division III of Part V of Chapter X or section 233 of chapter XII, 1[unless] the person has 2[paid or] deducted and paid the tax as required by Division IV of Part V of Chapter X; (d) any entertainment expenditure in excess of such limits 3[or in violation of such conditions] as may be prescribed; (e) any contribution made by the person to a fund that is not a recognised provident fund 4[approved pension fund], approved superannuation fund, or approved gratuity fund; (f) any contribution made by the person to any provident or other fund established for the benefit of employees of the person, unless the person has made effective arrangements to secure that tax is deducted under section 149 from any payments made by the fund in respect of which the recipient is chargeable to tax under the head "Salary"; (g) any fine or penalty paid or payable by the person for the violation of any law, rule or regulation; (h) any personal expenditures incurred by the person; (i) any amount carried to a reserve fund or capitalised in any way; (j) any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association; (k) ([ ] ((l) [any expenditure for a transaction, paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a bank or by crossed bank Substituted for “until” by Finance Act, 2003 Inserted by Finance Act, 2003 3 Inserted by Finance Act, 2003 4 Inserted by the Finance Act, 2005. 1 2 Â Income Tax Cir. No. 1 dated the 1st July, 2006 FULL DEDUCTIBILITY OF EXPENSE ON PERQUISITES. [Section 21(k)] Expenditure on provision of perquisites and allowances to an employee in excess of 50% of his salary [excluding the value of perquisites or amount of allowances] was not deductible in the hands of the employer. The restriction on admissibility of full expense on account of perquisites and allowances paid to an employee in the hands of the employer, has been removed by omitting clause (k) of section 21. This amendment will be applicable where expense is incurred on July 1, 2006 and onward. 5 Clause (k) omitted by the Finance Act, 2006. The old clause read as follows: (k) any expenditure paid or payable by an employer on the provision of perquisites and allowances to an employee where the sum of the value of the perquisites computed under section 13 and the amount of the allowances exceeds fifty per cent of the employee’s salary for a tax year (excluding the value of the perquisites or amount of the allowances); Ä Income Tax Cir. No. 1 dated the 1st July, 2006 RATIONALIZATION OF PROVISIONS RELATING TO DEDUCTIBILITY OF EXPENSE MADE THROUGH BANKING CHANNEL. [Section 21(l)] Any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank cheque or crossed bank draft, except expenditures not exceeding ten thousand rupees or on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation, was not be an allowable deduction upto tax year 2006. This provision was originally introduced under section 24(ff) in the repealed Ordinance, 1979. It was clarified through CBR’s Circular No.11 of 1998 dated July 25, 1998, stating that clause (ff) applies to expenditure normally chargeable to profit and loss account. The expenditure chargeable to trading and manufacturing accounts (like wages and freight or purchases debitable to the said accounts) fell out side the ambit of the said clause. Now the language of the section 21(l) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing accounts or profit and loss account will fall within the purview of said section. Further, the scope of banking transactions has also been expanded to include online transfer of payment from the business account of the payer to the business account of the payee and payment through credit cards subject to the condition that such transactions are verifiable from the bank statement of the respective payer and payee. This is an elaboration of the definition of banking transactions. It is explicitly clarified that any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank draft, shall not be an allowable deduction w.e.f. July 1, 2006. The restriction under this provision will not apply (as before) in respect of expenditure which 2010 – 2011 27 The Income Tax Ordinance, 2001 draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer: Provided that online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card shall be treated as transactions through the banking channel, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee: Provided further that this clause shall not apply in the case of— (a) expenditures not exceeding ten thousand rupees; (b) expenditures on account of — (i) utility bills; (ii) freight charges; (iii) travel fare; (iv) postage; and (v) payment of taxes, duties, fee, fines or any other statutory obligation;] (m) any salary paid or payable exceeding 2[fifteen] thousand rupees per month other than by a crossed cheque or direct transfer of funds to the employee’s bank account; and (n) except as provided in Division III of this Part, any expenditure paid or payable of a capital nature. Division III Deductions: Special Provisions 22. Depreciation.- (1) Subject to this section, a person shall be allowed a deduction for the depreciation of the person’s depreciable assets used in the person’s business in the tax year. (2) Subject to 3[sub-section] (3) 4[ ], the depreciation deduction for a tax year shall be computed by applying the rate specified in Part I of the Third Schedule against the written down value of the asset at the beginning of the year. (3) Where a depreciable asset is used in a tax year partly in deriving income from business chargeable to tax and partly for another use, the deduction allowed under this section for that year shall be restricted to the fair proportional part of the amount that would be allowed if the asset 5[was] wholly used to 6[derive] income from business chargeable to tax. (i) does not exceeding ten thousand rupees; or (ii) is on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation; As a consequence, CBR’s Circular No.11 of 1998 dated 25th July, 1998 being contrary to the provision of law is withdrawn, henceforth. 1 Clause (l) substituted by the Finance Act, 2006. The old clause read as follows: (l) any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank cheque or crossed bank draft, except expenditures not exceeding 1[1[ten] thousand rupees or on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, 1[fee], fines or any other statutory obligation;] 1 Substituted for the words “five hundred rupees or on account of postage or utility bills” by the Finance Ordinance, 2002 1 Substituted for the word “ five” by the Finance Act, 2004. 1 Substituted for “fees” by Finance Act, 2003 2 Substituted for “ten” by the Finance Act, 2008, earlier it was substituted for the word “ five” by the Finance Act, 2004. 3 The word “sub-sections” substituted by the Finance Act, 2005. 4 The word, brackets and figure “and (4)” omitted by Finance Act, 2004. 5 Substituted for “were” vide the Finance Act, 2010. 6 Substituted for “derived” by Finance Act, 2003 2010 – 2011 1[ 28 The Income Tax Ordinance, 2001 ] (5) The written down value of a depreciable asset of a person at the beginning of the tax year shall be – (a) where the asset was acquired in the tax year, the cost of the asset to the person as reduced by any initial allowance in respect of the asset under section 23; or (b) in any other case, the cost of the asset to the person as reduced by the total depreciation deductions (including any initial allowance under section 23) allowed to the person in respect of the asset in previous tax years. (6) Where sub-section (3) applies to a depreciable asset for a tax year, the written down value of the asset shall be computed on the basis that the asset has been solely used to derive income from business chargeable to tax. (7) The total deductions allowed to a person during the period of ownership of a depreciable asset under this section and section 23 shall not exceed the cost of the asset. (8) Where, in any tax year, a person disposes of a depreciable asset, no depreciation deduction shall be allowed under this section for that year and – (a) if the consideration received exceeds the written down value of the asset at the time of disposal, the excess shall be chargeable to tax in that year under the head “Income from Business”; or (b) if the consideration received is less than the written down value of the asset at the time of disposal, the difference shall be allowed as a deduction in computing the person’s income chargeable under the head “Income from Business” for that year. (9) Where sub-section (3) applies, the written down value of the asset for the purposes of subsection (8) shall be increased by the amount that is not allowed as a deduction as a result of the application of sub-section (3). (10) Where clause (a) of sub-section (13) applies, the 2[consideration received on disposal] of the passenger transport vehicle for the purposes of sub-section (8) shall be computed according to the following formula – A x B/C where – A is the 3[amount] received on disposal of the vehicle; B is the amount referred to in clause (a) of sub-section (13); and C is the actual cost of acquiring the vehicle. (11) Subject to sub-sections (13) and (14), the rules in Part III of Chapter IV shall apply in determining the cost and consideration received in respect of a depreciable asset for the purposes of this section. 1 Omitted by the Finance Act, 2004. The omitted sub-section (4) reads as follows: “(4) Where a depreciable asset is not used for the whole of the tax year in deriving income from business chargeable to tax, the deduction allowed under this section shall be computed according to the following formula, namely:– A x B/C where – A is the amount of depreciation computed under sub-section (2) or (3), as the case may be; B is the number of months in the tax year the asset is used in deriving income from business chargeable to tax; and C is the number of months in the tax year.” 2 Substituted for the words “written down value” by the Finance Act, 2004. 3 Substituted for the word “consideration” by the Finance Act, 2004. 2010 – 2011 29 The Income Tax Ordinance, 2001 1[(12) The depreciation deductions allowed to a leasing company or an investment bank or a modaraba or a scheduled bank or a development finance institution in respect of assets owned by the leasing company or an investment bank or a modaraba or a scheduled bank or a development finance institution and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.] (13) (a) For the purposes of this section, - Ê the cost of a depreciable asset being a passenger transport vehicle not plying for hire shall not exceed half] million] rupees; 2[one 3[and [4] (b) the cost of immovable property or a structural improvement to immovable property shall not include the cost of the land; 5[(c) any asset owned by a leasing company or an investment bank or a modaraba or a scheduled bank or a development finance institution and leased to another person is treated as used in the leasing company or the investment bank or the modaraba or the scheduled bank or the development finance institution’s business; and] (d) where the consideration received on the disposal of immovable property exceeds the cost of the property, the consideration received shall be treated as the cost of the property. (14) Where a depreciable asset that has been used by a person in Pakistan is exported or transferred out of Pakistan, the person shall be treated as having disposed of the asset at the time of the export or transfer for a consideration received equal to the cost of the asset. (15) In this section, - “depreciable asset” means any tangible movable property, immovable property (other than unimproved land), or structural improvement to immovable property, owned by a person that – (a) has a normal useful life exceeding one year; (b) is likely to lose value as a result of normal wear and tear, or obsolescence; and (c) is used wholly or partly by the person in deriving income from business chargeable to tax, Substituted by the Finance Ordinance, 2002. The original sub-section (12) read as follows: “(12) The depreciation deductions allowed to a leasing company in respect of assets owned by the company and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.” Ê EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ADMISSIBILITY OF DEPRECIATION ON PASSENGER TRANSPORT VEHICLES [Section 22(13)(a)] The cost of passenger transport vehicles not plying for hire was restricted to Rs. 1 million for the purpose of claiming depreciation by amendment made through Finance Act, 2002. Subsequently, through Finance, Act, 2005, this restriction was removed for the vehicles acquired on or after the first day of July, 2005. Resultantly, the taxpayers were claiming huge depreciation in respect of luxurious vehicles mostly used for personal purposes at the cost of revenue. In view of this, the said proviso has been omitted; however, the limit has been enhanced to Rs. 1.5 million keeping in view the increase in the prices of vehicles. EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. VALUE OF PASSENGER TRANSPORT VEHICLE FOR PURPOSES OF DEPRECIATION. [Section 22(13)(a)] Maximum value of passenger transport vehicle (not plying for hire) for the purpose of depreciation allowance was restricted to Rs.1 million. Section 22(13)(a) has been amended and maximum limit of Rs.1 million has been removed. The taxpayer can now claim depreciation on actual cost of acquisition of the vehicle. This benefit will be allowable in respect of passenger transport vehicles (not plying for hire) which will be acquired on or after July 1, 2005. 2 Substituted for “seven hundred and fifty thousand” by the Finance Ordinance, 2002 3 Words inserted vide the Finance Act, 2009. 4 Proviso omitted vide the Finance Act, 2009, the omitted text read as follows: 4[Provided that the prescribed limit of one million rupees shall not apply to passenger transport vehicles, not plying for hire, acquired on or after the first day of July, 2005.] 4 Proviso inserted vide Finance Act, 2005. 5 Substituted by the Finance Ordinance, 2002. The original clause read as follows: “(c) an asset owned by a financial institution or leasing company and leased to another person is treated as used in the financial institution or leasing company’s business; and”. 1 2010 – 2011 30 The Income Tax Ordinance, 2001 but shall not include any tangible movable property, immovable property, or structural improvement to immovable property in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of the property or improvement in the tax year in which the property is acquired or improvement made by the person; and “structural improvement” in relation to immovable property, includes any building, road, driveway, car park, railway line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage pipes, drainage, landscaping or dam. 23. Initial allowance.- (1) A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall be allowed a deduction (hereinafter referred to as an “initial allowance”) computed in accordance with sub-section (2), provided the asset is 1[used by the person for the purposes of his business for the first time or the tax year in which commercial production is commenced, whichever is later]. (2) The amount of the initial allowance of a person shall be computed by applying the rate specified in Part II of the Third Schedule against the cost of the asset. (3) The rules in section 76 shall apply in determining the cost of an eligible depreciable asset for the purposes of this section. 2[(4) A deduction allowed under this section to a leasing company or an investment bank or a modaraba or a scheduled bank or a development finance institution in respect of assets owned by the leasing company or the investment bank or the modaraba or the scheduled bank or the development finance institution and leased to another person shall be deducted only against the leased rental income derived in respect of such assets.] (5) In this section, 3“eligible depreciable asset” means a depreciable asset [ ]other than – (a) any road transport vehicle unless the vehicle is plying for hire; (b) any furniture, including fittings; (c) any plant or machinery 4[that has been used previously in Pakistan]; or (d) any plant or machinery in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of the asset in the tax year in which the asset is acquired. 5[ 23A. First year allowance.—(1) Plant, machinery and equipment installed by any industrial undertaking set up in specified rural and under developed areas, and owned and managed by a company shall be allowed first year allowance in lieu of initial allowance under section 23 at the rate specified in Part II of the Third Schedule against the cost of the “eligible depreciable assets” put to use after July 1, 2008. (2) The provisions of section 23, except sub-sections (1) and (2) thereof, shall mutatis mutandis apply. 1 Substituted for the words “wholly and exclusively used by the person in deriving income from business chargeable to tax” by the Finance Act, 2004. 2 Substituted by the Finance Ordinance, 2002. The original sub-section (4) read as follows: “(4) A deduction allowed under this section to a leasing company in respect of assets owned by the company and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.” 3 Words “that is plant or machinery,” omitted by Finance Act, 2003 4 Substituted by “that is acquired second hand” Finance Act, 2003 5 Section 23A. inserted by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008FIRST YEAR ALLOWANCE FOR INDUSTRIES IN SPECIFIED AREAS. [Section 23A]. Special incentive schemes i.e. tax holiday had been introduced in the past, to encourage industrial development with reference to rural areas, underdeveloped areas, industrial zones or for social reasons of promoting economic activity and generating employment opportunities. It also helped to some extent in spreading of industries across the country. 4.1 To encourage industrial investment in rural and under developed areas, instead of tax holiday, First Year Allowance @ 90% of the value of industrial assets has been allowed under section 23A to the industrial undertakings established in specified areas to be notified by the Federal Government. 2010 – 2011 31 The Income Tax Ordinance, 2001 (3) The Federal Government may notify “specified areas” for the purposes of sub-section (1).] 1[23B. Accelerated depreciation to alternate energy projects.- (1) Any plant, machinery and equipments installed for generation of alternate energy by an industrial undertaking set up anywhere in Pakistan and owned and managed by a company shall be allowed first year allowance in lieu of initial allowance under section 23, at the rate specified in Part II of the Third Schedule against the cost of the eligible depreciation assets put to use after first day of July, 2009. (2) The provisions of section 23 except sub-sections (1) and (2) thereof, shall mutatis mutandis apply.] 24. Intangibles.- (1) A person shall be allowed an amortisation deduction in accordance with this section in a tax year for the cost of the person’s intangibles – (a) that are wholly or partly used by the person in the tax year in deriving income from business chargeable to tax; and (b) that have a normal useful life exceeding one year. (2) No deduction shall be allowed under this section where a deduction has been allowed under another section of this Ordinance for the entire cost of the intangible in the tax year in which the intangible is acquired. (3) Subject to sub-section (7), the amortization deduction of a person for a tax year shall be computed according to the following formula, namely:– A B where – A is the cost of the intangible; and B is the normal useful life of the intangible in whole years. (4) An intangible – (a) with a normal useful life of more than ten years; or (b) that does not have an ascertainable useful life, shall be treated as if it had a normal useful life of ten years. (5) Where an intangible is used in a tax year partly in deriving income from business chargeable to tax and partly for another use, the deduction allowed under this section for that year shall be restricted to the fair proportional part of the amount that would be allowed if the intangible were wholly used to derive income from business chargeable to tax. (6) Where an intangible is not used for the whole of the tax year in deriving income from business chargeable to tax, the deduction allowed under this section shall be computed according to the following formula, namely:– A x B/C where – EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ACCELERATED DEPRECIATION TO ALTERNATE ENERGY PROJECTS. [Section 23B, section 57 and Third Schedule] A new section 23A has been inserted whereby First Year Allowance (FYA) at the rate of 90% of the cost of plant, machinery and equipment has been allowed. The plant, machinery and equipment has to be installed in Pakistan by a company set up for the purpose of alternate energy power generation. The FYA will be allowed in lieu of initial allowance allowed u/s 23 in respect of “eligible depreciation assets” put to use after July 01, 2009. This has been done to encourage investment in this sector both by residents and non-residents. The amendment has also been made in section 57 to allow carry forward of losses for indefinite period. Section 23B inserted vide the Finance Act, 2009. 1 2010 – 2011 A 32 The Income Tax Ordinance, 2001 is the amount of 1[amortization] computed under sub-section (3) or (5), as the case may be; B is the number of days in the tax year the intangible is used in deriving income from business chargeable to tax; and C is the number of days in the tax year. (7) The total deductions allowed to a person under this section in the current tax year and all previous tax years in respect of an intangible shall not exceed the cost of the intangible. (8) Where, in any tax year, a person disposes of an intangible, no amortisation deduction shall be allowed under this section for that year and – (a) if the consideration received by the person exceeds the written down value of the intangible at the time of disposal, the excess shall be income of the person chargeable to tax in that year under the head “Income from Business”; or (b) if the consideration received is less than the written down value of the intangible at the time of disposal, the difference shall be allowed as a deduction in computing the person’s income chargeable under the head “Income from Business” in that year. (9) For the purposes of sub-section (8) – (a) the written down value of an intangible at the time of disposal shall be the cost of the intangible reduced by the total deductions allowed to the person under this section in respect of the intangible or, where the intangible is not wholly used to derive income chargeable to tax, the amount that would be allowed under this section if the intangible were wholly so used; and (b) the consideration received on disposal of an intangible shall be determined in accordance with section 77. (10) For the purposes of this section, an intangible that is available for use on a day (including a nonworking day) is treated as used on that day. (11) In this section, “cost” in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible, including any expenditure incurred in improving or renewing the intangible; and “intangible” means any patent, invention, design or model, secret formula or process, copyright 2[, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, intellectual property], or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land). 25. Pre-commencement expenditure.- (1) A person shall be allowed a deduction for any precommencement expenditure in accordance with this section. (2) Pre-commencement expenditure shall be amortized on a straight-line basis at the rate specified in Part III of the Third Schedule. (3) The total deductions allowed under this section in the current tax year and all previous tax years in respect of an amount of pre-commencement expenditure shall not exceed the amount of the expenditure. 1 2 Substituted for the word “depreciation” by the Finance Ordinance, 2002 Inserted by Finance Act, 2003 2010 – 2011 33 The Income Tax Ordinance, 2001 (4) No deduction shall be allowed under this section where a deduction has been allowed under another section of this Ordinance for the entire amount of the pre-commencement expenditure in the tax year in which it is incurred. (5) In this section, “pre-commencement expenditure” means any expenditure incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility studies, construction of prototypes, and trial production activities, but shall not include any expenditure which is incurred in acquiring land, or which is depreciated or amortised under section 22 or 24. 26. Scientific research expenditure.- (1) A person shall be allowed a deduction for scientific research expenditure incurred in Pakistan in a tax year wholly and exclusively for the purpose of deriving income from business chargeable to tax. (2) In this section – “scientific research” means any 1[activity] 2[undertaken in Pakistan] in the fields of natural or applied science for the development of human knowledge; “scientific research expenditure” means any expenditure incurred by a person on scientific research in Pakistan] for the purposes of developing the person’s business, including any contribution to a scientific research institution to undertake scientific research for the purposes of the person’s business, other than expenditure incurred – 3[undertaken (a) in the acquisition of any depreciable asset or intangible; (b) in the acquisition of immovable property; or (c) for the purpose of ascertaining the existence, location, extent or quality of a natural deposit; and “scientific research institution” means any institution certified by the Federal Board of Revenue as conducting scientific research in Pakistan. 27. Employee training and facilities.- A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred in a tax year in respect of– (a) any educational institution or hospital in Pakistan established for the benefit of the person’s employees and their dependents; (b) any institute in Pakistan established for the training of industrial workers recognised, aided, or run by the Federal Government 4[or a Provincial Government] or a 5[Local Government]; or (c) the training of any person, being a citizen of Pakistan, in connection with a scheme approved by the Federal Board of Revenue for the purposes of this section. 28. Profit on debt, financial costs and lease payments.- (1) Subject to this Ordinance, a deduction shall be allowed for a tax year for – (a) any profit on debt incurred by a person in the tax year to the extent that the proceeds or benefit of the debt have been used by the person 6[for the purposes of business]; (b) any lease rental incurred by a person in the tax year to a scheduled bank, financial institution, an approved modaraba, an approved leasing company or a Special Purpose Vehicle on behalf of the Originator for an asset used by the person 1[for the purposes of business]; Substituted for the word “activities” by the Finance Ordinance, 2002 Inserted by Finance Act, 2003 3 Inserted by Finance Act, 2003 4 Inserted by Finance Act, 2003 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 Substituted for the words “in deriving income chargeable to tax under the head “Income from Business”” by the Finance Act, 2004. 1 2 2010 – 2011 34 The Income Tax Ordinance, 2001 (c) any amount incurred by a person in the tax year to a modaraba or a participation term certificate holder for any funds borrowed and used by the person 2[for the purposes of business]; (d) any amount incurred by a scheduled bank in the tax year to a person maintaining a profit or loss sharing account or a deposit with the bank as a distribution of profits by the bank in respect of the account or deposit; (e) any amount incurred by the House Building Finance Corporation (hereinafter referred to as “the Corporation”) constituted under the House Building Finance Corporation Act, 1952 (XVIII of 1952), in the tax year to the State Bank of Pakistan (hereinafter referred to as “the Bank”) as the share of the Bank in the profits derived by the Corporation on its investment in property made under a scheme of partnership in profit and loss, where the investment is provided by the Bank under the House Building Finance Corporation (Issue and Redemption of Certificates) Regulations, 1982; (f) any amount incurred by the National Development Leasing Corporation Limited (hereinafter referred to as “the Corporation”) in the tax year to the State Bank of Pakistan (hereinafter referred to as “the Bank”) as the share of the Bank in the profits derived by the Corporation on its leasing operations financed out of a credit line provided by the Bank on a profit and loss sharing basis; (g) any amount incurred by the 3[Small and Medium Enterprises Bank (hereinafter referred to as “the SME Bank”)] in the tax year to the State Bank of Pakistan (hereinafter referred to as the “Bank”) as the share of the Bank in the profits derived by the Corporation on investments made in small business out of a credit line provided by the Bank on a profit and loss sharing basis; (h) any amount incurred by a person in the tax year to a banking company under a scheme of musharika representing the bank’s share in the profits of the musharika; (i) any amount incurred by a person in the tax year to a certificate holder under a musharika scheme approved by the Securities and Exchange Commission and Religious Board formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) representing the certificate holder’s share in the profits of the musharika; or (j) the financial cost of the securitization of receivables incurred by an Originator in the tax year from a Special Purpose Vehicle being the difference between the amount received by the Originator and the amount of receivables securitized from a Special Purpose Vehicle. (2) Notwithstanding any other provision in this Ordinance, where any assets are transferred by an Originator, as a consequence of securitisation, to a Special Purpose Vehicle, it shall be treated as a financing transaction irrespective of the method of accounting adopted by the Originator. (3) In this section, - “approved leasing company” means a leasing company approved by the Federal Board of Revenue for the purposes of clause (b) of sub-section (1); and “approved modaraba” means a modaraba approved by the Federal Board of Revenue for the purposes of clause (b) of sub-section (1). 29. Bad debts.- (1) A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied, namely:(a) The amount of the debt was – (i) previously included in the person’s income from business chargeable to tax; or Substituted for the words “in deriving income chargeable to tax under the head “Income from Business”” by the Finance Act, 2004. Substituted for the words “in deriving income chargeable to tax under the head “Income from Business”” by the Finance Act, 2004. 3 Substituted for “Small Business Finance Corporation (hereinafter referred to as “the Corporation”)” vide the Finance Act, 2009. 1 2 2010 – 2011 35 The Income Tax Ordinance, 2001 (ii) in respect of money lent by a financial institution in deriving income from business chargeable to tax; (b) the debt or part of the debt is written off in the accounts of the person in the tax year; and (c) there are reasonable grounds for believing that the debt is irrecoverable. (2) The amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written off in the accounts of the person in the tax year. (3) Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the person receives in cash or kind any amount in respect of that debt, the following rules shall apply, namely:– (a) Where the amount received exceeds the difference between the whole of such bad debt and the amount previously allowed as a deduction under this section, the excess shall be included in the person’s income under the head “Income from Business” for the tax year in which it was received; or (b) where the amount received is less than the difference between the whole of such bad debt and the amount allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction in computing the person’s income under the head “Income from Business” for the tax year in which it was received. 1[29A. Provision regarding consumer loans.- (1) A [2] 3[non-banking finance company or House Building Finance Corporation] shall be allowed a deduction, not exceeding three per cent of income for the tax year, arising out of consumer loans for creation of a reserve to off-set bad debts arising out of such loans. (2) Where bad debt can not be wholly set off against reserve, any amount of bad debt, exceeding the reserves shall be carry forward for adjustment against the reserve for the following years.] 4[Explanation.- In this section, “consumer loan” means a loan of money or its equivalent made by [5] a nonbanking finance company or the House Building Finance Corporation to a debtor (consumer) and the loan is entered primarily for personal, family or household purposes and includes debts created by the use of a lender credit card or similar arrangement as well as insurance premium financing.] 30. Profit on non-performing debts of a banking company or development finance institution.- (1) A banking company or development finance institution 6[or Non-Banking Finance Company (NBFC) or modaraba] shall be allowed a deduction for any profit accruing on a non-performing debt of the banking company or institution 7[or Non-Banking Finance Company (NBFC) or modaraba] where the profit is credited to a suspense account in accordance with the Prudential Regulations for Banks or 8[or NonBanking Finance Company (NBFC) or modaraba], as the case may be, issued by the State Bank of Pakistan 9[or the Securities and Exchange Commission of Pakistan]. EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009PROVISION REGARDING CONSUMER LOANS.[Section 29A] Prior to Finance Act 2009, a banking company or non-banking finance company or house building finance corporation were allowed deductions not exceeding 3% of the income for the tax year arising out of consumer loans for creation of a reserve to setoff bad debts arising out of such loans. 8.1 Since special provisions for computation of income of a banking company will be operative through Seventh Schedule to the Income Tax Ordinance, 2001, from tax year 2009, therefore, the banking companies have been excluded from section 29A. Such companies would not be entitled to any provision regarding consumer loans with effect from July 1, 2009. However, they would be entitled to make provisions in accordance with Rule 1(c) of the Seventh Schedule for total advances and off balance sheet items as provided therein. Section 29A. inserted by Finance Act, 2003 2 Words “banking company or” omitted vide the Finance Act, 2009. 3 Inserted by the Finance Act, 2004. 4 Added by the Finance Act, 2004. 5 Words “a banking company or” omitted vide the Finance Act, 2009. 6 Inserted by Finance Act, 2003 7 Inserted by Finance Act, 2003 8 Substituted for “Non-bank Financial Institutions” by Finance Act, 2003 9 Inserted by Finance Act, 2003 1 2010 – 2011 36 The Income Tax Ordinance, 2001 (2) Any profit deducted under sub-section (1) that is subsequently recovered by the banking company or development finance institution 1[or Non-Banking Finance Company (NBFC) or modaraba]shall be included in the income of the company or institution 2[or Non-Banking Finance Company (NBFC) or modaraba] chargeable under the head “Income from Business” for the tax year in which it is recovered. 31. Transfer to participatory reserve.- (1) Subject to this section, a company shall be allowed a deduction for a tax year for any amount transferred by the company in the year to a participatory reserve created under section 120 of the Companies Ordinance, 1984 (XLVII of 1984) in accordance with an agreement relating to participatory redeemable capital entered into between the company and a banking company as defined in the Banking Tribunals Ordinance, 1984. (2) The deduction allowed under subsection (1) for a tax year shall be limited to five per cent of the value of the company’s participatory redeemable capital. (3) No deduction shall be allowed under subsection (1) if the amount of the tax exempted accumulation in the participatory reserve exceeds ten per cent of the amount of the participatory redeemable capital. (4) Where any amount accumulated in the participatory reserve of a company has been allowed as a deduction under this section is applied by the company towards any purpose other than payment of share of profit on the participatory redeemable capital or towards any purpose not allowable for deduction or exemption under this Ordinance the amount so applied shall be included in the income from business of the company in the tax year in which it is so applied. Division IV Tax Accounting 32. Method of accounting.- 3[(1) Subject to this Ordinance, a person’s income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person.] (2) Subject to sub-section (3), a company shall account for income chargeable to tax under the head “Income from Business” on an accrual basis, while other persons may account for such income on a cash or accrual basis. (3) The Federal Board of Revenue may prescribe that any class of persons shall account for income chargeable to tax under the head “Income from Business” on a cash or accrual basis. (4) A person may apply, in writing, for a change in the person’s method of accounting and the Commissioner may, by 4[order] in writing, approve such an application but only if satisfied that the change change is necessary to clearly reflect the person’s income chargeable to tax under the head “Income from Business”. (5) If a person’s method of accounting has changed, the person shall make adjustments to items of income, deduction, or credit, or to any other items affected by the change so that no item is omitted and no item is taken into account more than once. 33. Cash-basis accounting.- A person accounting for income chargeable to tax under the head “Income from Business” on a cash basis shall derive income when it is received and shall incur expenditure when it is paid. Inserted by Finance Act, 2003 Inserted by Finance Act, 2003 3 Substituted for “A person’s income chargeable to tax under the head “Income from Business” shall be computed in accordance with the method of accounting regularly employed by the person.” By Finance Act, 2003 4 Substituted for “notice” by Finance Act, 2003 1 2 2010 – 2011 37 The Income Tax Ordinance, 2001 34. Accrual-basis accounting.- (1) A person accounting for income chargeable to tax under the head “Income from Business” on an accrual basis shall derive income when it is due to the person and shall incur expenditure when it is payable by the person. (2) Subject to this Ordinance, an amount shall be due to a person when the person becomes entitled to receive it even if the time for discharge of the entitlement is postponed or the amount is payable by instalments. (3) Subject to this Ordinance, an amount shall be payable by a person when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy 1[ ]. 2[ ] (5) Where a person has been allowed a deduction for any expenditure incurred in deriving income chargeable to tax under the head “Income from Business” and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head “Income from Business” in the first tax year following the end of the three years. 3[(5A) Where a person has been allowed a deduction in respect of a trading liability and such person has derived any benefit in respect of such trading liability, the value of such benefit shall be chargeable to tax under 4[the] head “Income from Business” for the tax year in which such benefit is received.] (6) Where an unpaid liability is chargeable to tax as a result of the application of sub-section (5) and the person subsequently pays the liability or a part of the liability, the person shall be allowed a deduction for the amount paid in the tax year in which the payment is made. 35. Stock-in-trade.- (1) For the purposes of determining a person’s income chargeable to tax under the head “Income from Business” for a tax year, the cost of stock-in-trade disposed of by the person in the year shall be computed in accordance with the following formula, namely:– (A + B) – C where – A is the opening value of the person’s stock-in-trade for the year; B is cost of stock-in-trade acquired by the person in the year; and C is the closing value of stock-in-trade for the year. (2) The opening value of stock-in-trade of a person for a tax year shall be - (a) the closing value of the person’s stock-in-trade at the end of the previous year; or (b) where the person commenced to carry on business in the year, the fair market value of any stock-intrade acquired by the person prior to the commencement of the business. (3) The fair market value of stock-in-trade referred to in clause (b) of sub-section (2) shall be determined at the time the stock-in-trade is ventured in the business. The comma and words “, but not before economic performance occurs” omitted by the Finance Act, 2004. Omitted by the Finance Act, 2004. The omitted sub-section (4) read as follows: “(4) For the purposes of sub-section (3), economic performance shall occur (a) in the case of the acquisition of services or assets, at the time the services or assets are provided; (b) in the case of the use of assets, at the time the assets are used; and (c) in any other case, at the time payment is made in full satisfaction of the liability.” 3 Sub-section (5A) inserted by Finance Act, 2003 4 Inserted by the Finance Act, 2005. 1 2 2010 – 2011 38 The Income Tax Ordinance, 2001 (4) The closing value of a person’s stock-in-trade for a tax year shall be the lower of cost or 1[net realisable] value of the person’s stock-in-trade on hand at the end of the year. (5) A person accounting for income chargeable to tax under the head “Income from Business” on a cash basis may compute the person’s cost of stock-in-trade on the prime-cost method or absorption-cost method, and a person accounting for such income on an accrual basis shall compute the person’s cost of stock-in-trade on the absorption-cost method. (6) Where particular items of stock-in-trade are not readily identifiable, a person may account for that stock on the first-in-first-out method or the average-cost method but, once chosen, a stock valuation method may be changed only with the written permission of the Commissioner and in accordance with any conditions that the Commissioner may impose. (7) In this section, - “absorption-cost method” means the generally accepted accounting principle under which the cost of an item of stock-in-trade is the sum of direct material costs, direct labour costs, and factory overhead costs; “average-cost method” means the generally accepted accounting principle under which the valuation of stock-in-trade is based on a weighted average cost of units on hand; “direct labour costs” means labour costs directly related to the manufacture or production of stock-intrade; “direct material costs” means the cost of materials that become an integral part of the stock-in-trade manufactured or produced, or which are consumed in the manufacturing or production process; “factory overhead costs” means the total costs of manufacturing or producing stock-in-trade, other than direct labour and direct material costs; “first-in-first-out method” means the generally accepted accounting principle under which the valuation of stock-in-trade is based on the assumption that stock is sold in the order of its acquisition; “prime-cost method” means the generally accepted accounting principle under which the cost of stock-intrade is the sum of direct material costs, direct labour costs, and variable factory overhead costs; “stock-in-trade” means anything produced, manufactured, purchased, or otherwise acquired for manufacture, sale or exchange, and any materials or supplies to be consumed in the production or manufacturing process, but does not include stocks or shares; and “variable factory overhead costs” means those factory overhead costs which vary directly with changes in volume of stock-in-trade manufactured or produced. 36. Long-term contracts.- (1) A person accounting for income chargeable to tax under the head “Income from Business” on an accrual basis shall compute such income arising for a tax year under a long-term contract on the basis of the percentage of completion method. (2) The percentage of completion of a long-term contract in a tax year shall be determined by comparing the total costs allocated to the contract and incurred before the end of the year with the estimated total contract costs as determined at the commencement of the contract. (3) In this section, - “long-term contract” means a contract for manufacture, installation, or construction, or, in relation to each, the performance of related services, which is not completed within the tax year in which work under the contract commenced, other than a contract estimated to be completed within six months of the date on which work under the contract commenced; and 1 Substituted for the words “fair market” by the Finance Ordinance, 2002 2010 – 2011 39 The Income Tax Ordinance, 2001 “percentage of completion method” means the generally accepted accounting principle under which revenue and expenses arising under a long-term contract are recognised by reference to the stage of completion of the contract, as modified by sub-section (2). PART V HEAD OF INCOME: CAPITAL GAINS 37. Capital gains.- (1) Subject to this Ordinance, a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Capital Gains”. (2) Subject to sub-sections (3) and (4), the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:– A–B where – A is the consideration received by the person on disposal of the asset; and B is the cost of the asset. (3) Where a capital asset has been held by a person for more than one year 1[other than shares of public companies including the vouchers of Pakistan Telecommunication Corporation, modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984),] , the amount of any gain arising on disposal of the asset shall be computed in accordance with the following formula, namely:– Ax¾ where A is the amount of the gain determined under sub-section (2). (4) For the purposes of determining component B of the formula in sub-section (2), no amount shall be included in the cost of a capital asset for any expenditure incurred by a person – (a) that is or may be deducted under another provision of this Chapter; or (b) that is referred to in section 21. 2[(4A) Where the capital asset becomes the property of the person- (a) under a gift, bequest or will; (b) by succession , inheritance or devolution; (c) a distribution of assets on dissolution of an association of persons; or (d) on distribution of assets on liquidation of a company, the fair market value of the asset, on the date of its transfer or acquisition by the person shall be treated to be the cost of the asset.] (5) In this section, “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include – 1 2 Words inserted vide the Finance Act, 2010. Sub-section (4A) inserted by Finance Act, 2003 2010 – 2011 1[(a) 40 The Income Tax Ordinance, 2001 any stock-in-trade [2], consumable stores or raw materials held for the purpose of business;] (b) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortisation deduction under section 24; (c) any immovable property; 3[or] (d) any movable property 4[(excluding capital assets specified in sub-section (5) of section 38)] held for personal use by the person or any member of the person’s family dependent on the person.5 6 [ ] 7[37A. Capital gain on disposal of securities.- (1) The capital gain arising on or after the first day of July 2010, from disposal of securities held for a period of less than a year, shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule; Substituted for “(a) any stock-in-trade;” by the Finance Ordinance, 2002 Words “(not being stocks and shares)” omitted vide the Finance Act, 2010. 3 Added by the Finance Ordinance, 2002 4 Substituted for “(including wearing apparel, jewelry, or furniture)" by Finance Act, 2003 5 Substituted for “; or” by the Finance Ordinance, 2002 6 Omitted by Finance Ordinance, 2001. The omitted clause (e) reads as under: “(e) any modaraba certificate or any instrument of redeemable capital listed on any stock exchange or shares of a public company.” 7 Section 37A. inserted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 TAX ON CAPITAL GAINS ON DISPOSAL OF SECURITIES [Section 37A] On expiry of exemption on tax on capital gains, capital gains arising on disposal of securities has been made chargeable to capital gains tax through newly introduced section 37A:“Securities” For the purposes of capital gain tax (CGT), “securities” mean share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative products. Date of chargeability of CGT. Capital gain tax shall be chargeable on capital gain arising from securities disposed off on or after 1st July 2010. Charge of CGT according to the holding period. Capital gain tax shall not be chargeable on disposal of securities which are held for a period of more than one year. Holding period. Holding period of securities shall be calculated from the date of acquisition (whether before or after the thirtieth day of June, 2010) to the date of disposal of such security falling after 30th June 2010. Adjustment of losses. Adjustment of losses on disposal of securities in a tax year shall be adjustable only against the gain from disposal of any other securities and such loss shall not be carried forward to a subsequent tax year. Capital gains – a separate block of income. Capital gains on disposal of securities shall be taxed as a separate block of income and shall be charged on capital gain arising to securities holders irrespective of taxpayer’s tax (exemption) status. CGT on banking company and on insurance company. Provision of section 37AA are not applicable to an insurance company and a banking company as CGT in these cases is governed under the provisions of Fourth Schedule and the Seventh Schedule to the Income Tax Ordinance 2001, respectively. CGT by Collective Investment Scheme/Mutual Fund. A new proviso has been inserted under clause (103) Part-I of the Second Schedule to the Income Tax Ordinance, 2001whereby exemption from CGT available to a collective investment scheme registered with SECP/mutual fund has been restricted only to the investment by such schemes/funds which are debt or money market funds. Thus CGT is now chargeable on the unit holders of such schemes/funds at the time of redemption of a security by the unit holder and a collective investment scheme/mutual fund shall be responsible to deduct tax (at the prescribed CGT rates as given below) on redemption of securities. Such tax shall be adjustable against the overall CGT liability, and tax so deducted shall be payable to the relevant Commissioner Inland Revenue within seven days of its deduction. CGT Rates. The rate of capital gain tax under section 37A as specified in Division VII of Part I of the First Schedule to the Income Tax Ordinance, 2001 are as under:S.No. Period Tax Year Rate of Tax 10% (i) Where holding period of a security is less 2011 10% than six months. 2012 12.5% 2013 15% 2014 17.5% 2015 7.5% (ii) Where holding period of a security is more 2011 8% than six months but less than twelve 2012 8.5% months. 2013 9% 2014 9.5% 2015 10% 2016 1 2 2010 – 2011 The Income Tax Ordinance, 2001 41 Provided that this section shall not apply if the securities are held for a period of more than a year; Provided further that this section shall not apply to a banking company and an insurance company. (2) The holding period of a security, for the purposes of this section, shall be reckoned from the date of acquisition (whether before, on or after the thirtieth day of June, 2010) to the date of disposal of such security falling after the thirtieth day of June, 2010. (3) For the purposes of this section “security” means share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative products. (4) Gain under this section shall be treated as a separate block of income. (5) Notwithstanding anything contained in this Ordinance, where a person sustains a loss on disposal of securities in a tax year, the loss shall be set off only against the gain of the person from any other securities chargeable to tax under this section and no loss shall be carried forward to the subsequent tax year.] 38. Deduction of losses in computing the amount chargeable under the head “Capital Gains”.- (1) Subject to this Ordinance, in computing the amount of a person chargeable to tax under the head “Capital Gains” for a tax year, a deduction shall be allowed for any loss on the disposal of a capital asset by the person in the year. (2) No loss shall be deducted under this section on the disposal of a capital asset where a gain on the disposal of such asset would not be chargeable to tax. (3) The loss arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:– A–B where – A is the cost of the asset; and B is the consideration received by the person on disposal of the asset. (4) The provisions of sub-section (4) of section 37 shall apply in determining component A of the formula in sub-section (3). (5) No loss shall be recognised under this Ordinance on the disposal of the following capital assets, namely:– (iii) Where holding period of a security is more than one year. --- 0% Capital Gains Tax payable by the Insurance companies: Rules (6B) and (6C) have been introduced under the FOURTH SCHEDULE to the Income Tax Ordinance, 2001, for levy of CGT on disposal of securities by Insurance Companies. “Securities” shall have the same meaning as defined under Section 37A. CGT on Insurance Companies is chargeable at the following rates: Tax year Where withholding period of securities is less than six months Where withholding period of securities is more than six months but less than twelve months 8% 10% 2011 8.5% 12.5% 2012 9% 15% 2013 9.5% 17.5% 2014 10% 17.5% 2015 No CGT shall be chargeable on disposal of securities held for a period of more than one year by an insurance company. Loss on disposal of securities sustained in a tax year shall be set off only against the gain from any other securities chargeable to tax in the hands of such insurance company. No loss shall be carried forward to the subsequent tax year. 2010 – 2011 42 The Income Tax Ordinance, 2001 (a) A painting, sculpture, drawing or other work of art; (b) jewellery; (c) a rare manuscript, folio or book; (d) a postage stamp or first day cover; (e) a coin or medallion; or (f) an antique. PART VI HEAD OF INCOME: INCOME FROM OTHER SOURCES 39. Income from other sources.- (1) Income of every kind received by a person in a tax year, 1[if it is not included in any other head,] other than income exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Income from Other Sources”, including the following namely:– (a) 2[Dividend;] (b) 3[royalty;] (c) profit on debt; (d) ground rent; (e) rent from the sub-lease of land or a building; (f) income from the lease of any building together with plant or machinery; 4[(fa) income from provision of amenities, utilities or any other service connected with renting of building;] (g) any annuity or pension; (h) any prize bond, or winnings from a raffle, lottery 5[, prize on winning a quiz, prize offered by companies for promotion of sale] or cross-word puzzle; (i) any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources; (j) the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property; and (k) any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof. 6[(l) any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules, 2005;] Inserted by the Finance Ordinance, 2002 Substituted for the word “Dividends” by the Finance Ordinance, 2002 3 Substituted for the word “royalties” by the Finance Ordinance, 2002 4 Clause (fa) inserted by Finance Act, 2003 5 Inserted by Finance Act, 2003 6 Added by the Finance Act, 2005. 1 2 2010 – 2011 43 The Income Tax Ordinance, 2001 (2) Where a person receives an amount referred to in clause (k) of sub-section (1), the amount shall be chargeable to tax under the head “Income from Other Sources” in the tax year in which it was received and the following nine tax years in equal proportion. (3) Subject to sub-section (4), any amount received as a loan, advance, deposit 1[for issuance of shares] or gift by a person in 2[a tax year] from another person (not being a banking company or financial institution) otherwise than by a crossed cheque drawn on a bank or through a banking channel from a person holding a National Tax Number [3] shall be treated as income chargeable to tax under the head “Income from Other Sources” for the tax year in which it was received. (4) services. 4[(4A) Sub-section (3) shall not apply to an advance payment for the sale of goods or supply of Where – (a) any profit on debt derived from investment in National Savings Deposit Certificates including Defence Savings Certificate paid to a person in arrears or the amount received includes profit chargeable to tax in the tax year or years preceding the tax year in which it is received; and (b) as a result the person is chargeable at higher rate of tax than would have been applicable if the profit had been paid to the person in the tax year to which it relates, the person may, by notice in writing to the Commissioner, elect for the profit to be taxed at the rate of tax that would have been applicable if the profit had been paid to the person in the tax year to which it relates. (4B) An election under sub-section (4A) shall be made by the due date for furnishing the person’s return of income for the tax year in which the amount was received or by such later date as the Commissioner may allow by an order in writing.] (5) This section shall not apply to any income received by a person in a tax year that is chargeable to tax under any other head of income or subject to tax under section 5, 6 or 7. 5[ ] 40. Deductions in computing income chargeable under the head “Income from Other Sources”.- (1) Subject to this Ordinance, in computing the income of a person chargeable to tax under the head “Income from Other Sources” for a tax year, a deduction shall be allowed for any expenditure paid by the person in the year to the extent to which the expenditure is paid in deriving income chargeable to tax under that head, other than expenditure of a capital nature. (2) A person receiving any profit on debt chargeable to tax under the head “Income from Other Sources” shall be allowed a deduction for any Zakat paid by the person 6[ ]under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), at the time the profit is paid to the person. (3) A person receiving income referred to in clause 7[ ](f) of sub-section (1) of section 39 chargeable to tax under the head “Income from Other Sources” shall be allowed – (a) a deduction for the depreciation of any plant, machinery or building used to derive that income in accordance with section 22; and (b) an initial allowance for any plant or machinery used to derive that income in accordance with section 23. Inserted by Finance Act, 2003 Substituted for the words “an income year” by the Finance Ordinance, 2002 3 Word “Card” omitted by the Finance Act, 2006. 4 Sub-sections (4A) & (4B) inserted by Finance Act, 2003 5 Omitted by the Finance Ordinance, 2002. The omitted sub-section (6) read as follows: “(6) Expenditure is of a capital nature if it has a normal useful life of more than one year.” 6 Words “on the profit” omitted by Finance Act, 2003 7 Words “(e) or” omitted by Finance Act, 2003 1 2 2010 – 2011 44 The Income Tax Ordinance, 2001 (4) No deduction shall be allowed to a person under this section to the extent that the expenditure is deductible in computing the income of the person under another head of income. 5) The provisions of section 21 shall apply in determining the deductions allowed to a person under this section in the same manner as they apply in determining the deductions allowed in computing the income of the person chargeable to tax under the head "Income from Business". 1[(6) Expenditure is of a capital nature if it has a normal useful life of more than one year.] PART VII EXEMPTIONS AND TAX CONCESSIONS 41. Agricultural income.- (1) Agricultural income derived by a person shall be exempt from tax under this Ordinance. (2) In this section, “agricultural income” means, (a) any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes; (b) any income derived by a person from land situated in Pakistan from – (i) agriculture; (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by such person to render the produce raised or received by the person fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by such person, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii); or (c) any income derived by a person from – (i) any building owned and occupied by the receiver of the rent or revenue of any land described in clause (a) or (b); (ii) any building occupied by the cultivator, or the receiver of rent-in-kind, of any land in respect of which, or the produce of which, any operation specified in sub-clauses (ii) or (iii) of clause (b) is carried on, but only where the building is on, or in the immediate vicinity of the land and is a building which the receiver of the rent or revenue, or the cultivator, or the receiver of the rent-in-kind by reason of the person’s connection with the land, requires as a dwelling-house, a store-house, or other out-building. 42. Diplomatic and United Nations exemptions.- (1) The income of an individual entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 (IX of 1972) shall be exempt from tax under this Ordinance to the extent provided for in that Act. (2) The income of an individual entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948 (XX of 1948), shall be exempt from tax under this Ordinance to the extent provided for in that Act. (3) Any pension received by a person, being a citizen of Pakistan, by virtue of the person’s former employment in the United Nations or its specialised agencies (including the International Court of Justice) provided the person’s salary from such employment was exempt under this Ordinance. 1 Added by the Finance Ordinance, 2002. 2010 – 2011 45 The Income Tax Ordinance, 2001 43. Foreign government officials.- Any salary received by an employee of a foreign government as remuneration for services rendered to such government shall be exempt from tax under this Ordinance provided (a) the employee is a citizen of the foreign country and not a citizen of Pakistan; (b) the services performed by the employee are of a character similar to those performed by employees of the Federal Government in foreign countries; 1[and] (c) the foreign government grants a similar exemption to employees of the Federal Government performing similar services in such foreign country2[.] 3[ ] 44. Exemptions under international agreements.- (1) Any Pakistan-source income which Pakistan is not permitted to tax under a tax treaty shall be exempt from tax under this Ordinance. (2) Any salary received by an individual (not being a citizen of Pakistan) shall be exempt from tax under this Ordinance to the extent provided for in an Aid Agreement between the Federal Government and a foreign government or public international organisation, where – (a) the individual is either 4[not a resident] individual or a resident individual solely by reason of the performance of services under the Aid Agreement; (b) if the Aid Agreement is with a foreign country, the individual is a citizen of that country; and (c) the salary is paid by the foreign government or public international organisation out of funds or grants released as aid to Pakistan in pursuance of such Agreement. (3) Any income received by a person (not being a citizen of Pakistan) engaged as a contractor, consultant, or expert on a project in Pakistan shall be exempt from tax under this Ordinance to the extent provided for in a bilateral or multilateral technical assistance agreement between the Federal Government and a foreign government or public international organisation, where – (a) the project is financed out of grant funds in accordance with the agreement; (b) the person is either a non-resident person or a resident person solely by reason of the performance of services under the agreement; and (c) the income is paid out of the funds of the grant in pursuance of the agreement. 45. President’s honours.- (1) Any allowance attached to any Honour, Award, or Medal awarded to a person by the President of Pakistan shall be exempt from tax under this Ordinance. (2) Any monetary award granted to a person by the President of Pakistan shall be exempt from tax under this Ordinance. 46. Profit on debt.- Any profit received by a non-resident person on a security issued by a resident person shall be exempt from tax under this Ordinance where – (a) the persons are not associates; (b) the security was widely issued by the resident person outside Pakistan for the purposes of raising a loan outside Pakistan for use in a business carried on by the person in Pakistan; Added by the Finance Ordinance, 2002 Substituted for the comma and word “,and” by the Finance Ordinance, 2002 3 Omitted by the Finance Ordinance, 2002. The omitted clause (d) reads as under: “(d) the income is subject to tax in that foreign country.” 4 Substituted for “a non-resident” by Finance Act, 2003 1 2 2010 – 2011 46 The Income Tax Ordinance, 2001 (c) the profit was paid outside Pakistan; and (d) the security is approved by the Federal Board of Revenue for the purposes of this section. 47. Scholarships.- Any scholarship granted to a person to meet the cost of the person’s education shall be exempt from tax under this Ordinance, other than where the scholarship is paid directly or indirectly by an associate. 48. Support payments under an agreement to live apart.- 1[Any income received by a spouse as support payment under an agreement to live apart]shall be exempt from tax under this Ordinance. Â 49. Federal 3[Government,] Provincial Government, and 4[Local Government] income.- (1) The income of the Federal Government shall be exempt from tax under this Ordinance. (2) The income of a Provincial Government or a 5[Local Government] in Pakistan shall be exempt from tax under this Ordinance, other than income chargeable under the head “Income from Business” derived by a Provincial Government or 6[Local Government] from a business carried on outside its jurisdictional area. 7[(3) Subject to sub-section (2), any payment received by the Federal Government, a Provincial Government or a 8[Local Government] shall not be liable to any collection or deduction of advance tax.] 1 Substituted for the words “Any support payment received by a spouse under an agreement to live apart” by the Finance Ordinance, 2002. Â EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008SUBSTITUTION OF THE TERM “LOCAL AUTHORITY” WITH THE TERM “LOCAL GOVERNMENT” IN THE INCOME TAX ORDINANCE, 2001. Section 49 of the Ordinance, exempt income of Federal Government, Provincial Government and Local Authority from income tax. The term “Local Authority” was not defined in the Ordinance, due to which some organizations like National Highway Authority, Port Qasim Authority etc. tried to stretch the definition given in the General Clauses Act to avail exemption. The intention of the legislature was to provide exemption to a Municipal Committee, District and Tehsil Government etc. alongwith Federal Government, Provincial Government. 5.1 In order to bring clarity and avoid misinterpretation of the provision, the relevant provisions of the Ordinance have been amended, substituting the term “Local Authority” by the term “Local Government” so that, exemption is applicable as intended by the legislature. This would be in line with Article 165A of the Constitution as already stated in sub-section (4) of section 49. EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. TAXATION OF REGULATORY & DEVELOPMENT AUTHORITIES: [Section 49(3)] Regulatory authorities and development entities are liable to income tax. These authorities are covered by the definition of “company” given under Income Tax Ordinance but some of these entities have gone into litigation on the issue of taxability. In view of above a clarificatory amendment has been made in the law by adding a new sub-section to section 49, which specifically prescribes that income of a – (i) corporation; (ii) company; (iii) regulatory authority; (iv) other body; or (v) institution; established by or under a Federal law or a Provincial law or an existing law and setup, owned and controlled; (a) either directly; or (b) indirectly; by the Federal Government or a Provincial Government, is chargeable to tax. Further the ultimate destination of such income is not a bar for the purpose of chargeability of tax as laid down in Article 165A of the Constitution of Islamic Republic of Pakistan. ... Income Tax Cir. No. 1 dated the 1st July, 2006 EXEMPTION FROM WITHHOLDING TAX TO THE GOVERNMENT DEPARTMENTS. [Section 49] The provisions of section 49 provide exemption to the income of the – (i) Federal Government; (ii) a Provincial Government; or (iii) a local authority. Some of the sections pertaining to WHT do not provide explicitly exemption from such deduction or collection. Therefore, government departments were required to obtain exemption certificate from the Commissioner of Income Tax. Now, the Federal Government, Provincial Governments and local authorities (excluding those incomes of a provincial government or a local authority from a business carried on outside its jurisdiction) have been provided exemption explicitly from all withholding taxes deductible/collectable under the Income Tax Ordinance, 2001. 3 Substituted for “and” vide the Finance Act, 2009. 4 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 7 Sub-section (3) added by the Finance Act, 2006. 8 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 2010 – 2011 47 The Income Tax Ordinance, 2001 1[(4) Exemption under this section shall not be available in the case of corporation, company, a regulatory authority, a development authority, other body or institution established by or under a Federal law or a Provincial law or an existing law or a corportion, company a regulatory authority, a developmen authority or other body or institution set up, owned and controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution of the Islamic Republic of Pakistan.] 50. Foreign-source income of short-term resident individuals.- (1) Subject to sub-section (2), the foreignsource income of an individual 2[ ]– (a) who is a resident individual solely by reason of the individual’s employment; and (b) who is present in Pakistan for a period or periods not exceeding three years, shall be exempt from tax under this Ordinance. (2) This section shall not apply to – (a) any income derived from a business of the person established in Pakistan; or (b) any foreign-source income brought into or received in Pakistan by the person. 51. Foreign-source income of returning expatriates.- 3[(1)]Any foreign-source income derived by a citizen citizen of Pakistan in a tax year who was not a resident individual in any of the four tax years preceding the tax year in which the individual became a resident shall be exempt from tax under this Ordinance in the tax year in which the individual became a resident individual and in the following tax year. 4[(2) Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year, tax year, any income chargeable under the head "Salary" earned by him out side Pakistan during that year shall be exempt from tax under this Ordinance.] 5[(52)] 53. Exemptions and tax concessions in the Second Schedule.- (1) The income or classes of income, or persons or classes of persons specified in the Second Schedule shall be – (a) exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein; (b) subject to tax under this Ordinance at such rates, which are less than the rates specified in the First Schedule, as are specified therein; (c) allowed a reduction in tax liability under this Ordinance, subject to any conditions and to the extent specified therein; or (d) exempted from the operation of any provision of this Ordinance, subject to any conditions and to the extent specified therein. 1[(1A) Where any income which is exempt from tax under any provision of the Second Schedule, such such income, as may be specified in the said Schedule and subject to such conditions as may be specified Sub-section (4) added by the Finance Act, 2007. Words “(other than a citizen of Pakistan)” omitted by Finance Act, 2003 3 Numbered as sub-section (1) by Finance Act, 2003 4 Sub-section (2) inserted by Finance Act, 2003 5 Omitted by the Finance Ordinance, 2002. The omitted section read as under: “52. Non-resident shipping and airline enterprises.- (1) Subject to sub-section (2), any income of a non-resident person, for the time being approved by the Federal Government for the purpose of this section, from the operation of ships and aircraft in international traffic shall be exempt from tax under this Ordinance, other than income from ships and aircraft operated principally to transport passengers, livestock, mail, or goods exclusively between places in Pakistan. (2) Sub-section (1) shall not apply to a non-resident person where the person’s country of residence does not allow a similar exemption to a resident of Pakistan.” 1 2 2010 – 2011 48 The Income Tax Ordinance, 2001 therein, shall be included in the total income, however the tax shall not be payable in respect of such income.] (2) The Federal Government may, from time to time, by notification in the official Gazette, make such amendment in the Second Schedule by – (a) adding any clause or condition therein; (b) omitting any clause or condition therein; or (c) making any change in any clause or condition therein, as the Government may think fit, and all such amendments shall have effect in respect of any tax year beginning on any date before or after the commencement of the financial year in which the notification is issued. (3) The Federal Government shall place before the National Assembly all amendments made by it to the Second Schedule in a financial year. ∇ 54. Exemptions and tax provisions in other laws.- No provision in any other law providing for – (a) an exemption from any tax imposed under this Ordinance; (b) a reduction in the rate of tax imposed under this Ordinance; (c) a reduction in tax liability of any person under this Ordinance; or (d) an exemption from the operation of any provision of this Ordinance, shall have legal effect unless also provided for in this Ordinance2[. 55. Limitation of exemption.- (1) Where any income is exempt from tax under this Ordinance, the exemption shall be, in the absence of a specific provision to the contrary contained in this Ordinance, limited to the original recipient of that income and shall not extend to any person receiving any payment wholly or in part out of that income. 3[ ] Sub-section (1A) inserted by Finance act, 2003 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008WITHDRAWAL OF EXEMPTIONS AVAILABLE UNDER OTHER STATUTES. [Section 54]. Exemption from tax available through other statutes of the Government was withdrawn by virtue of overriding provision of section 54 of the Ordinance. Such exemptions included pension of a former President of Pakistan and his widow under President’s Pension Act 1954, State Bank of Pakistan Act 1956, State Bank of Pakistan Banking Services Ordinance, 2001, RDFC, Pakistan Broadcasting Corporation, Small Business Finance Corporation, Federal Bank for Cooperative, ADBP, Pakistan Telecommunication Authority, National Telecommunication Corporation, Pakistan Telecommunication Employees Trust, PTCL, International Financial Corporation (IFC), etc. However, a proviso to section 54 was inserted through Finance Act 2003 to protect such exemptions provided under other statutes and not incorporated in Second Schedule to the Income Tax Ordinance, 2001. The said protection apart from discriminatory had a revenue cost impacting tax to GDP ratio. The FBR has been reviewing exemptions under the Ordinance and 35 exemptions have been withdrawn through Finance Act, 2008. It was also not possible to know exact number of exemptions allowed under other statutes and review their retention. 6.2 The proviso to section 54 has, therefore, been omitted to do away with all such exemptions so as to improve tax to GDP ratio, improve taxation and enforce the overriding provisions of section 54. However, exemption to the pension of a former President of Pakistan and his widow under President’s Pension Act 1974, State Bank of Pakistan Act, 1956 and State Bank of Pakistan Banking Services Ordinance, 2001 have been specifically provided vide sub-clauses (xix) and (xx) of clause (66) of Part I of the Second Schedule to the Ordinance, respectively. 2 Proviso omitted by the Finance Act, 2008, the omitted proviso read as follows: 2[: Provided that any exemption from income tax 2[or a reduction in the rate of tax or a reduction in tax liability of any person or an exemption from the operation of any provision of this Ordinance] provided in any other law and in force on the commencement of this Ordinance shall continue to be available unless withdrawn.] 1 ∇ Proviso inserted by Finance Act, 2003 Inserted by the Finance Act, 2004. 3 Sub-section (2) read as follows: 2 2 2010 – 2011 49 The Income Tax Ordinance, 2001 PART VIII LOSSES 56. Set off of losses.- (1) Subject to sections 58 and 59, where a person sustains a loss for any tax year under any head of income specified in section 11, the person shall be entitled to have the amount of the loss set off against the person’s income, if any, chargeable to tax under any other head of income for the year. (2) Except as provided in this Part, where a person sustains a loss under a head of income for a tax year that cannot be set off under sub-section (1), the person shall not be permitted to carry the loss forward to the next tax year. (3) Where, 1[in a tax year,] a person sustains a loss under the head “Income from Business” and a loss under another head of income, the loss under the head “Income from Business shall be set off last. 2[Ó56A. Set off of losses of companies operating hotels.— Subject to sections 56 and 57, where a company registered in Pakistan or Azad Jammu and Kashmir (AJ&K), operating hotels in Pakistan or AJ&K, sustains a loss in Pakistan or AJ&K for any tax year under the head “income from business” shall be entitled to have the amount of the loss set off against the company’s income in Pakistan or AJ&K, as the case may be, from the tax year 2007 onword.] 57. Carry forward of business losses.- (1) Where a person sustains a loss for a tax year under the head “Income from Business” (other than a loss to which section 58 applies) and the loss cannot be wholly set off under section 56, so much of the loss that has not been set off shall be carried forward to the following tax year and set off against the person’s income chargeable under the head “Income from Business” for that year. (2) If a loss sustained by a person for a tax year under the head “Income from Business” is not wholly set off under sub-section (1), then the amount of the loss not set off shall be carried forward to the following tax year and applied as specified in sub-section (1) in that year, and so on, but no loss can be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed. 3[(2A) Where a loss, referred to in sub-section (2), relating to any assessment year commencing on or after 1st day of July, 1995, and ending on the 30th day of June 2001, is sustained by a banking company wholly owned by the Federal Government as on first day of June, 2002, which is approved by the State Bank of Pakistan for the purpose of this sub-section, the said loss shall be carried forward for a period of ten years.] (3) Where a person has a loss carried forward under this section for more than one tax year, the loss of the earliest tax year shall be set off first. (4) Where the loss referred to in sub-section (1) includes deductions allowed under sections 22, 234[, 23A, 23B] and 24 that have not been set off against income, the amount not set off shall be added to the deductions allowed under those sections in the following tax year, and so on until completely set off. (5) In determining whether a person’s deductions under sections 22, 235[, 23A, 23B] and 24 have been set off against income, the deductions allowed under those sections shall be taken into account last. “(2) Where a person’s income from business is exempt from tax under this Ordinance as a result of a tax concession, any loss sustained in the period of the exemption shall not be set off against the person’s income chargeable to tax after the exemption expires.” Omitted by Finance Act, 2003 1 Inserted by the Finance Ordinance, 2002 2 Section 56A inserted by the Finance Act, 2007. Ó EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. SET-OFF OF BUSINESS LOSSES ARISING TO COMPANIES OPERATING HOTELS IN PAKISTAN AND AJ&K. [Section 56A] Previously companies registered in Pakistan or AJ&K were not allowed to set off business loss against income arising in Pakistan or AJ&K and vice versa. A new section 56A has been added in the Income Tax Ordinance 2001, which provides set off of business loss arising to companies registered in Pakistan and operating hotels in AJ&K against business income arising in Pakistan. 3 Inserted by the Finance Ordinance, 2002. 4 Inserted vide the Finance Act, 2009. 5 Inserted vide the Finance Act, 2009. 2010 – 2011 50 The Income Tax Ordinance, 2001 1[57A. ÊSet off of business loss consequent to amalgamation. – 2[(1) The assessed loss (excluding capital loss) for the tax year, other than brought forward and capital loss, of the amalgamating company or companies shall be set off against business profits and gains of the amalgamated company, and vice versa, in the year of amalgamation and where the loss is not adjusted against the profits and gains for the tax year the unadjusted loss shall be carried forward for adjustment upto a period of six tax years succeeding the year of amalgamation.] (2) The provisions of sub-section (4) and (5) of section 57 shall, mutatis mutandis, apply for the purposes of allowing unabsorbed depreciation of amalgamating company or companies in the assessment of amalgamated company 3[and vice versa] 4[:] 5[Provided that the losses referred to in sub-section (1) and unabsorbed depreciation referred to in subsection (2) shall be allowed set off subject to the condition that the amalgamated company continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation.] 6[(2A). In case of amalgamation of Banking Company or Nonbanking Finance Company, modarabas or insurance company, the accumulated loss under the head “Income from Business” (not being speculation business losses) of an amalgamating company or companies shall be set off or carried forward against the business profits and gains of the amalgamated company and vice versa, up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in the case of amalgamated company or amalgamating company or companies: Added by the Finance Ordinance, 2002. Ê EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008SET-OFF OF BUSINESS LOSS CONSEQUENT TO AMALGAMATION OF BANKING COMPANIES, NON BANKING FINANCE COMPANIES, INSURANCE COMPANIES AND MODARABAS. [Section 57A]. Under section 57A, assessed loss (excluding capital loss) for the “tax year”, other than brought forward and capital loss, can be set-off in the case of amalgamation of two companies for a period upto six years, succeeding the year of amalgamation. However, un-absorbed depreciation is allowable as per the provisions of sub-section (4) and (5) of section 57. 7.2 To encourage amalgamation of Banking Companies, NBFCs, Modarabas and Insurance Companies, the facility of carry forward of “accumulated loss” under the head “income from business” (not being speculation business losses) for a period of six years succeeding the tax year in which the loss was first computed in the case of amalgamated company or amalgamating company or companies has been allowed. It will facilitate the amalgamation of one or more such companies and modarabas as was available from the tax year, 2002, through the Finance Act, 2002. However, this facility will be available again to NBFC, insurance and modarabas from tax year 2008, and for Banking companies from tax year 2007 and onwards. EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. ADJUSTMENT OF BROUGHT FORWARD LOSSES IN CASE OF AMALGAMATION OF COMPANIES. [Section 57A] Prior to Finance Act 2007, amalgamation meant merger of one or more; (i) banking companies; or (ii) non-banking financial institutions; or (iii) insurance companies; or (iv) companies owning and managing industrial undertaking in which at least one company is a; (a) public company; or (b) company incorporated under a specific law other than the Companies Ordinance 1984. The meaning of “amalgamation” has been extended to include companies engaged in providing services other than trading companies. Furthermore, on amalgamation the business loss other than speculation loss of an amalgamating company was available for set-off against the business profits and gains of an amalgamated company for 6 tax years. This set-off has been withdrawn for amalgamation taking place on or after 1st July, 2007. EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. SET-OFF OF BUSINESS LOSSES CONSEQUENT TO AMALGAMATION. [Section 57A] The provision for set-off of business loss consequent to amalgamation was introduced in 2002 in terms of section 57A by virtue of which the accumulated business loss of an amalgamating company could be set-off or carried forward against the profits of the amalgamated company upto a period of six years. This section has been amended and in case of amalgamation/merger, two way set off of losses has been provided so that the losses available in the case of amalgamating company as well as the amalgamated company can be set off in either case. This provision shall be effective from tax year 2006 and onwards. 2 Sub-section substituted by the Finance Act, 2007, the old subsection read as follows: (1) The accumulated loss under the head “Income from Business” (not being a loss to which section 58 applies) of an amalgamating company or companies shall be set off or carried forward against the business profits and gains of the amalgamated company 2[and vice versa,] up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in the case of 2[amalgamated company or] amalgamating company or companies. 2 Inserted by the Finance Act, 2005. 2 Inserted by the Finance Act, 2005. 3 Inserted by the Finance Act, 2005. 4 The full stop substituted by the Finance Act, 2005. 5 Inserted by the Finance Act, 2005. 6 Sub-section 2(A) inserted by the Finance Act, 2008. 1 2010 – 2011 51 The Income Tax Ordinance, 2001 Provided that the provisions of this sub-section shall in the case of Banking companies be applicable from July 1, 2007] (3) Where any of the conditions as laid down by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan 1[or any court], as the case may be, in the scheme of amalgamation, are not fulfilled, the set off of loss or allowance for depreciation made in any tax year of the amalgamated company 2[or the amalgamating company or companies] shall be deemed to be the income of that amalgamated company 3[or the amalgamating company or companies, as the case may be,] for the year in which such default is discovered by the Commissioner or taxation officer, and all the provisions of this Ordinance shall apply accordingly.] 58. Carry forward of speculation business losses.- (1) Where a person sustains a loss for a tax year in respect of a speculation business carried on by the person (hereinafter referred to as a “speculation loss”), the loss shall be set off only against the income of the person from any other speculation business of the person chargeable to tax for that year. (2) If a speculation loss sustained by a person for a tax year is not wholly set off under sub-section (1), then the amount of the loss not set off shall be carried forward to the following tax year and applied against the income of any speculation business of the person in that year and applied as specified in subsection (1) in that year, and so on, but no speculation loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed. (3) Where a person has a loss carried forward under this section for more than one tax year, the loss of the earliest tax year shall be set off first. 59. Carry forward of capital losses.- (1) Where a person sustains a loss for a tax year under the head “Capital Gains” (hereinafter referred to as a “capital loss”), the loss shall not be set off against the person’s income, if any, chargeable under any other head of income for the year, but shall be carried forward to the next tax year and set off against the capital gain, if any, chargeable under the head “Capital Gains” for that year. (2) If a capital loss sustained by a person for a tax year under the head “Capital Gains” is not wholly set off under sub-section (1), then the amount of the loss not set off shall be carried forward to the following tax year, and so on, but no loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed. (3) Where a person has a loss carried forward under this section for more than one tax year, the loss of the earliest tax year shall be set off first. 4[59A. Limitations on set off and carry forward of losses.- (1) In case of an association of persons to which sub-section (3) of section 92 applies, any loss which cannot be set off against any other income of the association of persons in accordance with section 56, shall be dealt with as provided under sub-section (2) of section 93. (2) Nothing contained in section 57, section 58 or section 59 shall entitle an association of persons, to which sub-section (3) of section 92 applies to have its loss carried forward and set off thereunder. (3) Any association of persons, to which sub-section (3) of section 92 does not apply, any loss of such association shall be set off or carried forward and set off only against the income of the association. (4) Nothing contained in section 56, 57, 58 or 59 shall entitle – (a) any member of an association of persons to which sub-section (3) of section 92 does not apply, to set off any loss sustained by such association of persons, as the case may be, or have it carried forward and set off, against his income; or Inserted by the Finance Act, 2005. Inserted by the Finance Act, 2005. 3 Inserted by the Finance Act, 2005. 4 Section 59A. inserted by Finance Act, 2003 1 2 2010 – 2011 52 The Income Tax Ordinance, 2001 (b) any person who has succeeded, in such capacity, any other person carrying on any business or profession, otherwise than by inheritance, to carry forward and set off against his income, any loss sustained by such other person. (5) Where in computing the taxable income for any tax year, full effect cannot be given to a deduction mentioned in section 22, 23, 24 or 25 owing to there being no profits or gains chargeable for that year or such profits or gains being less than the deduction, then, subject to sub-section (12) of section 22, and sub-section (6), the deduction or part of the deduction to which effect has not been given, as the case may be, shall be added to the amount of such deduction for the following year and be treated to be part of that deduction, or if there is no such deduction for that year, be treated to be the deduction for that year and so on for succeeding years. (6) Where, under sub-section (5), deduction is also to be carried forward, effect shall first be given to the provisions of section 56 and sub-section (2) of section 58. (7) Notwithstanding anything contained in this Ordinance, no loss which has not been assessed or determined in pursuance of an order made under section 59, 59A, 62, 63 or 65 of the repealed Ordinance or an order made or treated as made under section 120, 121 or 122 shall be carried forward and set off under section 57, sub-section (2) of section 58 or section 59.] 1[Ó59AA. Group taxation. —(1) Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal unit. In such cases, besides consolidated group accounts as required under the Companies Ordinance, 1984 (XLVII of 1984), computation of income and tax payable shall be made for tax purposes. (2) The companies in the group shall give irrevocable option for taxation under this section as one fiscal unit. (3) The group taxation shall be restricted to companies locally incorporated under the Companies Ordinance, 1984 (XLVII of 1984). (4) The relief under group taxation would not be available to losses prior to the formation of the group. (5) The option of group taxation shall be available to those group companies which comply with such corporate governance requirements as may be specified by the Securities and Exchange commission of Pakistan from time to time and are designated as companies entitled to avail group taxation. (6) Group taxation may be regulated through rules as may be made by the Federal Board of Revenue.] 2[59B. ÐGroup relief.—(1) Subject to sub-section (2), any company, being a subsidiary of a holding company, may surrender its assessed loss (excluding capital loss) for the tax year (other than brought Section 59A inserted by the Finance Act, 2007. Ó EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. GROUP TAXATION. [Section 59AA] The concept of “Group Taxation” has been introduced through newly inserted section 59AA. The salient features of the regime are as follows: (i) 100% owned group of companies locally incorporated under the Companies Ordinance, 1984 will be taxed as a single fiscal unit, provided an irrevocable option is exercised to be taxed as a group; (ii) Losses incurred by the group company will be off-set against income of other group companies; (iii) Consolidated group account as required under the Companies Ordinance, 1984 will form; (a) the basis of computation of income; and (b) tax payable by the group. (iv) the relief under group taxation will not be available to losses prior to the formation of the group; (v) any income derived, on or after 1st July 2007, from inter corporate dividend within a group companies, entitled to group taxation under section 59AA shall be exempt [clause (103A), Part I of Second Schedule]. 2 Section 59B substituted by the Finance Act, the old section read as follows: 2[59B. (Group Relief.- (1) Subject to sub-section (2), any company, being a subsidiary of a public company listed on a registered stock exchange in Pakistan, owning and managing an industrial undertaking [or an undertaking engaged in providing services], may surrender its assessed loss for the tax year other than brought forward losses, in favour of its holding company provided such holding company owns or acquires seventy-five per cent or more of the share capital of the subsidiary company. (2) The loss surrendered by the subsidiary company may be claimed by the holding company for set off against its income under the head “Income from Business” in the tax year and the following two tax years subject to the following conditions, namely:1 2010 – 2011 53 The Income Tax Ordinance, 2001 forward losses and capital losses), in favour of its holding company or its subsidiary or between another subsidiary of the holding company: Provided that where one of the company in the group is a public company listed on a registered stock exchange in Pakistan, the holding company shall directly hold fiftyfive per cent or more of the share capital of the subsidiary company. Where none of the companies in the group is a listed company, the holding company shall hold directly seventy-five per cent or more of the share capital of the subsidiary company. (2) The loss surrendered by the subsidiary company may be claimed by the holding company or a subsidiary company for set off against its income under the head “income from Business” in the tax year and the following two tax years subject to the following conditions, namely:— (a) there is continued ownership of share capital of the subsidiary company to the extent of seventy-five per cent or more for five years; and (b) the subsidiary company continues the same business during the said period of five years. (3) The subsidiary company shall not be allowed to surrender its assessed losses for set off against income of the holding company for more than three tax years. (4) Where the losses surrendered by a subsidiary company are not adjusted against income of the holding company in the said three tax years, the subsidiary company shall carry forward the unadjusted losses in accordance with the provision of section 57. (5) If there has been any disposal of shares by the holding company during the aforesaid period of five years to bring the ownership of the holding company to less than seventy-five per cent, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company.] 2 Added by the Finance Act, 2004. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. GROUP RELIEF. [Section 59B] Finance Act 2004 provided Group Relief by allowing a subsidiary company, being a subsidiary of a public company listed on a registered stock exchange of Pakistan, owning and managing an industrial undertaking, to surrender its tax loss for the tax year, other than brought forward losses, in favour of its holding company provided such holding company owned or acquired 75% or more of the share capital of the subsidiary company. For expanding the scope of the group company relief, section 59B has been amended to include the services sector also which includes activities such as hotels, information technology, communications, shipping and transport. Other conditions shall continue to apply in order to qualify for the concession. The aforesaid benefit is extended w.e.f. tax year 2006. 2 Inserted by the Finance Act, 2005. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. REVIEW OF LAW RELATING TO HOLDING COMPANIES. [Section 59B – Section 169(3)] Section 59B was added through the Finance Act, 2004, with the purpose ofproviding group relief by way of allowing a holding company with certain conditions, to set-off losses incurred by its subsidiary. The existing regime has been substituted through the Finance Act 2007. The salient features of the changes brought in the scheme are as follows: (i) a subsidiary company may surrender its assessed losses (excluding capital loss or brought forward losses) for the tax year in favour of its holding company or between the subsidiaries of the holding company or between another subsidiary of the holding company; (ii) holding company shall be a public company listed on a registered stock exchange in Pakistan or a private limited company; (iii) holding company being a public company, should directly hold 55 percent or more of the share capital of the subsidiary company. Where none of the companies in the group is a listed company, the holding company shall hold directly 75% or more of the share capital of the subsidiary company; (iv) losses surrendered by the subsidiary company can be claimed by the holding company or a subsidiary for set-off against its “income from business” in the tax years in which losses have been surrendered and the following two tax years; (v) there should be a continued ownership of prescribed shareholding for five years. In case of disposal of shares in a year bringing the ownership below the prescribed threshold, the holding company shall be required to offer for tax the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company; (vi) a company within the group engaged in the business of trading shall not be entitled to avail group relief; (vii) a private limited company, being a holding company, should get listed within 3 years from the year in which loss is claimed; (viii) group companies should be locally incorporated companies under thecompanies Ordinance, 1984; (ix) loss surrendered and claimed should have approval from the Board of Directors of the respective companies; (x) subsidiary company should continue the same business during the period of 3 years; (xi) all the companies in the group shall comply with such corporate governance requirements as may be specified by the SECP from time to time and are designated as companies entitled to avail group erlief; (xii) subsidiary company shall not be allowed to surrender its assessed loss for se-off against income of the holding company for more than (consecutive) 3 tax years; (xiii) any unadjusted surrendered loss after the period of 3 years, shall be available to the surrendering subsidiary company to carry forward according to statute of limitation; (xiv) loss claiming company, with the approval of Board of Directors shall transfer cash to the loss surrendering company equal to the amount of applicable tax rate on the profits to be set off against the acquired loss. The transfer of cash would not be taken as a taxable event in the case of either of the 2 companies; (xv) transfer of shares between companies and shareholders in one direction, would not be taken as a taxable event if the purpose is to hold share capital for formation of group and approval of; (a) Securities and Exchange Commission of Pakistan; or (b) State Bank of Pakistan whichever, applicable, has been obtained. However, sale and purchase from third party would be taken as taxable event and after acquiring shares for purpose of group formation, if sold in the open market or to a third party shall attract tax on the capital gains, if any, arising from such sale. 2010 – 2011 54 The Income Tax Ordinance, 2001 (a) there is continued ownership for five years, of share capital of the subsidiary company to the extent of fifty-five per cent in the case of a listed company, or seventy-five per cent or more, in the case of other companies; (b) a compnay within the group engaged in the business of trading shall not be entitled to avail group relief; (c) holding company, being a private limited company with seventy-five per cent of ownership of share capital gets itself listed within three years from the year in which loss is claimed; (d) the group companies are locally incorporated companies under the Companies Ordinance, 1984 (XLVII of 1984); (e) the loss surrendered and loss claimed under this section shall have approval of the Board of Directors of the respective companies; (f) the subsidiary company continues the same business during the said period of three years; (g) all the companies in the group shall comply with such corporate governance requirements as may be specified by the Securities and Exchange Commission of Pakistan from time to time, and are designated as companies entitled to avail group relief”; and (h) any other condition as may be prescribed. (3) The subsidiary company shall not be allowed to surrender its assessed losses for set off against income of the holding company for more than three tax years. (4) Where the losses surrendered by a subsidiary company are not adjusted against income of the holding company in the said three tax years, the subsidiary company shall carry forward the unadjusted losses in accordance with section 57. (5) If there has been any disposal of shares by the holding company during the aforesaid period of five years to bring the ownership of the holding company to less than fiftyfive per cent or seventy-five per cent, as the case may be, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company. (6) Loss claiming company shall, with the approval of the Board of Directors, transfer cash to the loss surrendering company equal to the amount of tax payable on the profits to be set off against the acquired loss at the applicable tax rate. The transfer of cash would not be taken as a taxable event in the case of either of the two companies. (7) The transfer of shares between companies and the share holders, in one direction, would not be taken as a taxable event provided the transfer is to acquire share capital for formation of the group and approval of the Security and Exchange Commission of Pakistan or State Bank of Pakistan, as the case may be, has been obtained in this effect. Sale and purchase from third party would be taken as taxable event.] PART IX DEDUCTIBLE ALLOWANCES 60. Zakat.- (1) A person shall be entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax year under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980). (2) Sub-section (1) does not apply to any Zakat taken into account under sub-section (2) of section 40. (3) Any allowance or part of an allowance under this section for a tax year that is not able to be deducted under section 9 for the year shall not be refunded, carried forward to a subsequent tax year, or carried back to a preceding tax year. 2010 – 2011 55 The Income Tax Ordinance, 2001 1[60A. Workers' Welfare Fund.- A person shall be entitled to a deductible allowance for the amount of any Workers' Welfare Fund paid by the person in tax year under Workers' Welfare Fund Ordinance, 1971 (XXXVI of 1971)] 2[.] 3[60B. Workers’ Participation Fund.- A person shall be entitled to a deductible allowance for the amount of any Workers’ Participation Fund paid by the person in a tax year in accordance with the provisions of the Companies Profit (Workers’ Participation) Act, 1968 (XII of 1968).] PART X TAX CREDITS 61. Charitable donations.- 4[(1) A person shall be entitled to a tax credit in respect of any sum paid, or any property given by the person in the tax year as a donation to – (a) any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law; (b) any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a Provincial Government or a 5[Local Government]; or (c) any non-profit organization. ] (2) The amount of a person’s tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely:– (A/B) x C where – A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part; B is the person’s taxable income for the tax year; and C is the lesser of – (a) the total amount of the person’s donations referred to in sub-section (1) in the year, including the fair market value of any property given; or (b) where the person is – (i) or an individual or association of persons, thirty per cent of the taxable income of the person for the year; (ii) a company, 6[twenty] per cent of the taxable income of the person for the year. Section 60A. inserted by Finance Act, 2003 Inserted by the Finance Act, 2005. 3 Added by the Finance Act, 2004. 4 Substituted for ” (1) A person shall be entitled to a tax credit for a tax year in respect of any amount paid, or property given by the person in the tax year as a donation to a non-profit organisation.” By Finance Act, 2003 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAX CREDIT ON ADMISSIBLE DONATIONS. [Section 61(2)(b)(ii)] In the case of a company, an amount of tax credit allowed for a tax year is computed at an average rate of tax on the lesser of the amount of donations or 15% of the taxable income for the year. In order to encourage the charitable activities, the limit of 15% has been enhanced to 20%. Substituted for “fifteen” vide the Finance Act, 2009. 1 2 2010 – 2011 56 The Income Tax Ordinance, 2001 (3) For the purposes of clause (a) of component C of the formula in sub-section (2), the fair market value of any property given shall be determined at the time it is given. (4) A cash amount paid by a person as a donation shall be taken into account under clause (a) of component C 1[of] sub-section (2) only if it was paid by a crossed cheque drawn on a bank. 2[(5) The Federal Board of Revenue may make rules regulating the procedure of the grant of approval under sub-clause (c) of clause (36) of section 2 and any other matter connected with, or incidental to, the operation of this section.] ∇ ->(62. Investment in shares.- (1) A person 3[other than a company] shall be entitled to a tax credit for a tax year in respect of the cost of acquiring in the year new shares offered to the public by a public company listed on a stock exchange in Pakistan where the person [other than a company] is the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan. (2) The amount of a person’s tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: – (A/B) x C where – A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part; B is the person’s taxable income for the tax year; and C is the lesser of – (a) the total cost of acquiring the shares referred to in sub-section (1) in the year; (b) ten per cent of the person’s [taxable] income for the year; or (c) 6 [7[three] (3) hundred] thousand rupees. Where – (a) a person has 8[been allowed] a tax credit under sub-section (1) in a tax year in respect of the purchase of a share; and (b) the person has made a disposal of the share within twelve months of the date of acquisition, the amount of tax payable by the person for the tax year in which the shares were disposed of shall be increased by the amount of the credit allowed. Inserted by the Finance Ordinance, 2002. Sub-section (5) inserted by Finance Act, 2003 Â Income Tax Cir. No. 1 dated the 1st July, 2006 TAX CREDIT FOR INVESTMENT IN IPOs. [Section 62] Before amendment in section 62 tax credit was available on investment in Initial Public Offerings (IPOs) upto maximum investment of Rs.150.000/-. In order to encourage savings and to provide incentive for fresh investment, this limit has been enhanced to Rs.200,000/- for the purpose of tax credit under section 62 of the Income Tax Ordinance, 2001, where investment is made on July 1, 2006 and onward. ∇ EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. ENHANCEMENT OF LIMIT FOR CLAIMING TAX REBATE ON INVESTMENT IN NEW SHARES. [Section 62] In order to provide further incentive for investment in new shares, the ceiling for investment for claiming tax credit under section 62 has been enhanced from Rs.100,000 to Rs.150,000 with effect from tax year *[2006]. * Substituted for “2005” vide IT Cir. No. 3 of 2005 dt. 11/7/05. 3 Inserted by Finance Act, 2003 4 Inserted by Finance Act, 2003 5 Substituted for “total” by finance Act, 2003 6 Words substituted for “one hundred 6[and fifty]” by the Finance Act, 2006. 6 Inserted by the Finance Act, 2005. 7 Word “two” substituted by the Finance Act, 2007. 8 Substituted for “claimed” by Finance Act, 2003 1 2 2010 – 2011 57 The Income Tax Ordinance, 2001 Ê 1[63. Contribution to an Approved Pension Fund. – (1) An eligible person as defined in sub-section (19A) of section 2 deriving income chargeable to tax under the head “Salary” or the head “Income from Business” shall be entitled to a tax credit for a tax year in respect of any contribution or premium paid in the year by the person in approved pension fund under the Voluntary Pension System Rules, 2005. (2) The amount of a person’s tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: (A/B) x C Where.A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit under this Part; B is the person’s taxable income for the tax year; and C is the lesser of - (i) the total contribution or premium referred to in sub-section (1) paid by the person in the year; or (ii) twenty per cent of the 2[eligible] person’s taxable income for the relevant tax year; Provided that 3[an eligible person] joining the pension fund at the age of forty-one years or above, during the first ten years 1 Section 63 substituted by the Finance Act, 2005. The original section 63 read as follows: “63. Retirement annuity scheme. – (1) Subject to sub-section (3), a resident individual deriving income chargeable to tax under the head “Salary” or the head “Income from Business” shall be entitled to a tax credit for a tax year in respect of any contribution or premium paid in the year by the person under a contract of annuity scheme approved by, A[Securities and Exchange Commission of Pakistan] of an insurance company duly registered under the Insurance Ordinance, 2000 (XXXIX of 2000), having its main object the provision to the person of an annuity in old age. (2) The amount of a resident individual’s tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: – (A/B) x C where – A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part; B is the person’s taxable income for the tax year; and C is the lesser of – (a) the total contribution or premium referred to in sub-section (1) paid by the individual in the year; (b) B[ten] percent of the person’s C[taxable] income for the tax year; or (c) [D[two] hundred] thousand rupees. (3) A person shall not be entitled to a tax credit under sub-section (1) in respect of a contract of annuity which provides – (a) for the payment during the life of the person of any amount besides an annuity; (b) for the annuity payable to the person to commence before the person attains the age of sixty years; (c) that the annuity is capable, in whole or part, of surrender, commutation, or assignment; or (d) for payment of the annuity outside Pakistan.” A Substituted for the letters “SECP,” B Substituted for the word “five” by the Finance Act, 2003. C Substituted for the word “total” by the Finance Act, 2003. D The word “One” substituted by the Finance Act, 2003. Earlier the word “fifty” was substituted by the words “One hundred” by the Finance Ordinance, 2002. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. MEASURES FOR IMPLEMENTATION OF VOLUNTARY PENSION SYSTEM RULES. [Section 63] Section 63 “Retirement Annuity Scheme” has been substituted as “Contribution to an Approved Pension Fund” to be approved by the SECP and the main object of the Scheme is to make provision for the contribution for old age and to allow tax credit to the taxpayer for such contribution. The profit or gain or benefit derived by the pension fund or the pension fund manager from the pension fund, approved under the VPS Rules, 2005 will be exempt from tax on redemption of the seed capital invested in Pension Fund under clause (57) of Part I of Second Schedule. Consequent to above amendments, the following expressions have been defined in section 2 of the Income Tax Ordinance, 2001. Description Under Clause (i) Approved Annuity Plan; 3A (ii) Approved Income Payment Plan; 3B (iii) Approved Pension Fund; 3C (iv) Contribution to an Approved Pension Fund; 13B (v) Eligible Person; 19A (vi) Individual Pension Account; and 29B (vii) Pension Fund Manager. 40A 2 Inserted by the Finance Act, 2006. 3 Substituted for “a person” by the Finance Act, 2006 2010 – 2011 58 The Income Tax Ordinance, 2001 1[starting from July 1, 2006], shall be allowed additional contribution of 2% per annum for each year of age exceeding forty years. Provided further that the total contribution allowed to such person shall not exceed 50% of the total taxable income of the preceding year; or (iii) five hundred thousand rupees.] 2[(3) The transfer by the members of approved employment pension or annuity scheme or approved occupational saving scheme of their existing balance to their individual pension accounts maintained with one or more pension fund managers shall not qualify for tax credit under this section.] 364. Profit on debt.- 4[(1) A person shall be entitled to a tax credit for a tax year in respect of any profit or share in rent and share in appreciation for value of house paid by the person in the year on a loan by a scheduled bank or non-banking finance institution regulated by the Security and Exchange Commission of Pakistan or advanced by Government or the 5[Local Government] 6[or a statutory body or a public company listed on a registered stock exchange in Pakistan] where the person utilizes the loan for the construction of a new house or the acquisition of a house.] (2) The amount of a person’s tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely: – (A/B) x C where – A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part; B is the person’s taxable income for the tax year; and C is the lesser of – (a) the total profit referred to in sub-section (1) paid by the person in the year; (b) 7[fifty] per cent of the person’s 8[taxable] income for the year; or (c) [9seven hundred and fifty] thousand rupees. (3) A person is not entitled to 1[tax credit] under this section for any profit deductible under section 17. 1 Words, figures and comma substituted for “of the notification of the Voluntary Pension System Rules, 2005,” by the Finance Act, 2006. 2 Sub-section (3) added by the Finance Act, 2006. 3 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAX CREDIT ON PROFIT ON DEBT FOR CONSTRUCTION OF NEW HOUSE OR ACQUISITION OF HOUSE. [Section 64] A person is entitled to tax credit for a tax year in respect of housing loans from a scheduled bank or non-banking finance institution or advanced by Government or Local Government which are utilized for construction of a new house or acquisition of house. The tax credit before amendment through Finance Act, 2009 was to be computed at the average rate of tax on lesser of: - total profit on debt - 40 percent of taxable income of taxpayer - Rs. 500,000/After amendment, the above limits have been increased as under. - The limit of 40% taxable income has been increased to 50%. - The ceiling of Rs. 500,000/- has been raised to Rs. 750,000/-. 4 Substituted for the following “(1) A person shall be entitled to a tax credit for a tax year in respect of any profit or share in rent and share in appreciation of value of house paid by the person in the year on a loan by a scheduled bank under a house finance scheme approved by the State Bank of Pakistan or advanced by Government, the local authority or House Building Finance Corporation where the person utilizes the loan for the construction of a new house or the acquisition of a house.” By Finance Act, 2003 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 Inserted by the Finance Act, 2004. 7 Substituted for “forty“ by the Finance Act, 2009 and “twenty five” by the Finance Act, 2003 8 Substituted for “total” by finance Act, 2003 9 Substituted for “five hundred” vide the Finance Act, 2009 and “fifty” & “one hundred” vide Finance Ordinance 2002 and the Finance Act, 2003 2010 – 2011 59 The Income Tax Ordinance, 2001 65. Miscellaneous provisions relating to tax credits.- (1) Where the person entitled to a tax credit under Part is a member of an association of persons to which sub-section (1) of section 92 applies, the following shall apply – 2[this] (a) component A of the formula in sub-section (2) of section 61, sub-section (2) of section 62, sub-section (2) of section 63 and sub-section (2) of section 64 shall be the amount of tax that would be assessed to the individual if any amount derived in the year that is exempt from tax under sub-section (1) of section 92 were chargeable to tax; and (b) component B of the formula in sub-section (2) of section 61, sub-section (2) of section 62, sub-section (2) of section 63 and sub-section (2) of section 64 shall be the taxable income of the individual for the year if any amount derived in the year that is exempt from tax under sub-section (1) of section 92 were chargeable to tax. (2) Any tax credit allowed under this Part shall be applied in accordance with sub-section (3) of section 4. (3) Subject to sub-section (4), any tax credit or part of a tax credit allowed to a person under this Part for a tax year that is not able to be credited under sub-section (3) of section 4 for the year shall not be refunded, carried forward to a subsequent tax year, or carried back to a preceding tax year. (4) Where the person to whom sub-section (3) applies is a member of an association of persons to which sub-section (1) of section 92 applies, the amount of any excess credit under sub-section (3) for a tax year may be claimed as a tax credit by the association for that year. (5) Sub-section (4) applies only where the member and the association agree in writing for the subsection to apply and such agreement in writing must be furnished with the association’s return of income for that year. 3[65A. Tax credit to a person registered under the Sales Tax Act, 1990.- (1) Every manufacturer, registered under the Sales Tax Act, 1990, shall be entitled to a tax credit of two and a half per cent of tax payable for a tax year, if ninety per cent of his sales are to the person who is registered under the aforesaid Act during the said tax year. (2) For claiming of the credit, the person shall provide complete details of the persons to whom the sales were made. (3) No credit will be allowed to a person whose income is covered under final tax or minimum tax. (4) Carry forward of any amount where full credit may not be allowed against the tax liability for the tax year, shall not be allowed.] 4[65B. Tax credit for investment.- (1) Where a taxpayer being a company invests any amount in the purchase of a plant and machinery, for the purposes of balancing, modernization and replacement of the Substituted for the words “a deductible allowance” by the Finance Ordinance, 2002 Inserted by the Finance Ordinance, 2002 3 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAX CREDIT FOR MANUFACTURER MAKING SALES TO SALES TAX REGISTERED PERSONS. [Section 65A] For broadening of tax base a new section 65A has been inserted whereby every manufacturer registered under the Sale Tax Act, 1990 is entitled to a tax credit of 2.5% of tax payable for tax year if 90% of sales are made to persons who are registered under the Sales Tax Act, 1990. For claiming the tax credit, the taxpayer, will however be required to provide complete details of the persons to whom the sales were made during the tax year. The facility, however is not allowed to a person whose income is covered under the final or minimum tax regime. However, no carry forward of such credit is allowed. Section 65A inserted vide the Finance Act, 2009. 4 Sections 65B & 65C inserted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 TAX CREDIT FOR INVESTMENT IN INDUSTRIAL UNDERTAKING. [Section 65B]. In order to encourage companies for investment in balancing, modernization and replacement of the already installed plant and machinery in an industrial undertaking set up in Pakistan and owned by such company under the provisions of newly inserted section 65B, 10% rebate in income tax payable for the tax year in which such plant and machinery is installed, shall be admissible if 1 2 2010 – 2011 60 The Income Tax Ordinance, 2001 plant and machinery, already installed therein, in an industrial undertaking set up in Pakistan and owned by it, credit equal to ten per cent of the amount so invested shall be allowed against the tax payable by it in the manner hereinafter provided. (2) The provisions of sub-section (1) shall apply if the plant and machinery is purchased and installed at any time between the first day of July, 2010, and the 30th day of June, 2015. (3) The amount of credit admissible under this section shall be deducted from the tax payable by the taxpayer in respect of the tax year in which the plant or machinery in the purchase of which the amount referred to in sub-section (1) is invested and installed. (4) Where no tax is payable by the taxpayer in respect of the tax year in which such plant or machinery is installed, or where the tax payable is less than the amount of credit, the amount of the credit or so much of it as is in excess thereof, as the case may be, shall be carried forward and deducted from the tax payable by the tax payer in respect of the following tax year, and so on, but no such amount shall be carried forward for more than two tax years, however, the deduction made under sub-section (2) and this sub-section shall not exceed in aggregate the limit specified in sub-section (1). (5) Where any credit is allowed under this section and subsequently it is discovered by the Commissioner Inland Revenue that any one or more of the conditions specified in this section was, or were, not fulfilled, as the case may be, the credit originally allowed shall be deemed to have been wrongly allowed and the Commissioner Inland Revenue may, notwithstanding anything contained in this Ordinance, re-compute the tax payable by the taxpayer for the relevant year and the provisions of this Ordinance shall, so far as may be, apply accordingly; 65C. Tax credit for enlistment.- (1) Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to five per cent of the tax payable shall be allowed for the tax year in which the said company is enlisted.] such investment is made in the purchase and installation of plant and machinery at any time between the 1st day of July, 2010 and the 30th day of June, 2015. In case where investment in purchase of machinery and completion of installation thereof do not occur in the same tax year, such tax rebate shall be admissible in the tax year of installation of such plant and machinery. In cases where no tax is payable by the taxpayer in the year of installation of plant and machinery or where the tax payable is less than the amount of tax credit, the amount of such credit or the amount of unadjusted tax credit, as the case may be, shall be carried forward and deducted from the tax payable by the taxpayer in respect of the following tax year, and so on, but no such amount shall be carried forward for more than two tax years and shall not exceed in aggregate the 10% limit as specified. INCENTIVE FOR ENLISTMENT BY A COMPANY [Section 65C] To encourage companies for enlistment in any registered stock exchange in Pakistan, a new section 65C has been introduced through Finance Act, 2010 in the Income Tax Ordinance, 2001, whereby companies opting for enlistment shall be entitled to the benefit of 5% tax credit on tax payable in the tax year of its enlistment. 2010 – 2011 61 The Income Tax Ordinance, 2001 CHAPTER IV COMMON RULES PART I GENERAL 66. Income of joint owners.- (1) For the purposes of this Ordinance and subject to sub-section (2), where any property is owned by two or more persons and their respective shares are definite and ascertainable – (a) the persons shall not be assessed as an association of persons in respect of the property; and (b) the share of each person in the income from the property for a tax year shall be taken into account in the computation of the person’s taxable income for that year. (2) This section shall not apply in computing income chargeable under the head “Income from Business”. 67. Apportionment of deductions.- (1) Subject to this Ordinance, where an expenditure relates to – (a) the derivation of more than one head of income; or 1[(ab) derivation of income comprising of taxable income and any class of income to which subsections (4) and (5) of section 4 apply, or;] (b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates. (2) The Federal Board of Revenue may make rules under section 2[237] for the purposes of apportioning deductions. 68. Fair market value.- (1) For the purposes of this Ordinance, the fair market value of any property 3[or rent], asset, service, benefit or perquisite at a particular time shall be the price which the property 4[or rent], asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the open market at that time. (2) The fair market value of any property 5[or rent], asset, service, benefit or perquisite shall be determined without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash. 6[(3) Where the price referred to in sub-section (1) is not ordinarily ascertainable, such price may be determined by the Commissioner.] 69. Receipt of income.- For the purposes of this Ordinance, a person shall be treated as having received an amount, benefit, or perquisite if it is – (a) actually received by the person; (b) applied on behalf of the person, at the instruction of the person or under any law; or (c) made available to the person. Inserted by the Finance Ordinance, 2002. Substituted for the figure “232” by the Finance Ordinance, 2002. 3 Inserted by Finance Act, 2003 4 Inserted by Finance Act, 2003 5 Inserted by Finance Act, 2003 6 Sub-section (3) inserted by Finance Act, 2003 1 2 2010 – 2011 62 The Income Tax Ordinance, 2001 70. Recouped expenditure.- Where a person has been allowed a deduction for any expenditure or loss incurred in a tax year in the computation of the person’s income chargeable to tax under a head of income and, subsequently, the person has received, in cash or in kind, any amount in respect of such expenditure or loss, the amount so received shall be included in the income chargeable under that head for the tax year in which it is received. 71. Currency conversion.- (1) Every amount taken into account under this Ordinance shall be in Rupees. (2) Where an amount is in a currency other than rupees, the amount shall be converted to the Rupee at the State Bank of Pakistan 1[ ]rate applying between the foreign currency and the Rupee on the date the amount is taken into account for the purposes of this Ordinance. 72. Cessation of source of income.- Where – (a) any income is derived by a person in a tax year from any business, activity, investment or other source that has ceased either before the commencement of the year or during the year; and (b) if the income had been derived before the business, activity, investment or other source ceased it would have been chargeable to tax under this Ordinance, this Ordinance shall apply to the income on the basis that the business, activity, investment or other source had not ceased at the time the income was derived. 73. Rules to prevent double derivation and double deductions.- (1) For the purposes of this Ordinance, where – (a) any amount is chargeable to tax under this Ordinance on the basis that it is receivable, the amount shall not be chargeable again on the basis that it is received; or (b) any amount is chargeable to tax under this Ordinance on the basis that it is received, the amount shall not be chargeable again on the basis that it is receivable. (2) For the purposes of this Ordinance, where – (a) any expenditure is deductible under this Ordinance on the basis that it is payable, the expenditure shall not be deductible again on the basis that it is paid; or (b) any expenditure is deductible under this Ordinance on the basis that it is paid, the expenditure shall not be deductible again on the basis that it is payable. PART II TAX YEAR 2[74. Tax year.- (1) for the purpose of this Ordinance and subject to this section, the tax year shall be a period of twelve months ending on the 30th day of June (hereinafter referred to as ‘normal tax year’) and shall, subject to sub-section (3), be denoted by the calendar year in which the said date falls. Words “mid-exchange” omitted by Finance Act, 2003 Substituted by the Finance Ordinance, 2002. The original section 74 read as follows: “74. Tax year.- (1) For the purposes of this Ordinance and subject to this section, the tax year shall be the period of twelve months ending on the 30th day of June (referred to in this section as the financial year). (2) A person may apply, in writing, to use as the person’s tax year a twelve-month period (hereinafter referred to as a “special year”) other than the financial year and the Commissioner may, subject to sub-section (4), by notice in writing, approve the application. (3) A person granted permission under sub-section (2) to use a special year may apply, in writing, to change the person’s tax year to the financial year or to another special year and the Commissioner may, subject to sub-section (4), by notice in writing, approve such application. (4) The Commissioner may approve an application under sub-section (2) or (3) only if the person has shown a compelling need to use a special year or to change the person’s tax year and any approval shall be subject to such conditions as the Commissioner may prescribe. (5) The Commissioner may, by notice in writing to a person, withdraw the permission to use a special year granted under sub-section (2) or (3). 1 2 2010 – 2011 63 The Income Tax Ordinance, 2001 (2) Where a person’s income year, under the repealed Ordinance, is different from the normal tax year, or where a person is allowed, by an order under sub-section (3), to use a twelve months’ period different from normal tax year, such income year or such period shall be that person’s tax year (hereinafter referred to as ‘special tax year’) and shall, subject to sub-section (3), be denoted by the calendar year relevant to normal tax year in which the closing date of the special tax year falls. 1[(2A) The Federal Board of Revenue,- (i) in the case of a class of persons having a special tax year different from a normal tax year may permit, by a notification in the official Gazette, to use a normal tax year; and (ii) in the case of a class of persons having a normal tax year may permit, by a notification in the official Gazette, to use a special tax year.] (3) A person may apply, in writing, to the Commissioner to allow him to use a twelve months’ period, other than normal tax year, as special tax year and the Commissioner may, subject to sub-section (5), by an order, allow him to use such special tax year. (4) A person using a special tax year, under sub-section (2), may apply in writing, to the Commissioner to allow him to use normal tax year and the Commissioner may, subject to sub-section (5), by an order, allow him to use normal tax year. (5) The Commissioner shall grant permission under sub-section (3) or (4) only if the person has shown a compelling need to use special tax year or normal tax year, as the case may be, and the permission shall be subject to such conditions, if any, as the Commissioner may impose. (6) An order under sub-section (3) or (4) shall be made after providing to the applicant an opportunity of being heard and where his application is rejected the Commissioner shall record in the order the reasons for rejection. (7) The Commissioner may, after providing to the person concerned an opportunity of being heard, by an order, withdraw the permission granted under sub-section (3) or (4). (8) An order under sub-section (3) or (4) shall take effect from such date, being the first day of the special tax year or the normal tax year, as the case may be, as may be specified in the order. (9) Where the tax year of a person changes as a result of an order under sub-section (3) or subsection (4), the period between the end of the last tax year prior to change and the date on which the changed tax year commences shall be treated as a separate tax year, to be known as the “transitional tax year”. (10) In this Ordinance, a reference to a particular financial year shall, unless the context otherwise requires, include a special tax year or a transitional tax year commencing during the financial year. (11) A person dissatisfied with an order under sub-section (3), (4) or (7) may file a review application to the Federal Board of Revenue, and the decision by the Federal Board of Revenue on such application shall be final.] (6) A notice served by the Commissioner under sub-section (2) shall take effect on the date specified in the notice and a notice under sub-section (3) or (5) shall take effect at the end of the special year of the person in which the notice was served. (7) Where the tax year of a person changes as a result of sub-section (2), (3) or (5), the period between the last full tax year prior to the change and the date on which the changed tax year commences shall be treated as a separate tax year, to be known as the “transitional year”. (8) In this Ordinance, a reference to a particular financial year shall include a special year or a transitional year of a person commencing during the financial year. (9) A person dissatisfied with a decision of the Commissioner under sub-section (2), (3) or (5) may challenge the decision only under the appeal procedure in Part III of Chapter X.” 1 Added by the Finance Act, 2004. 2010 – 2011 64 The Income Tax Ordinance, 2001 PART III ASSETS 75. Disposal and acquisition of assets.- (1) A person who holds an asset shall be treated as having made a disposal of the asset at the time the person parts with the ownership of the asset, including when the asset is – (a) sold, exchanged, transferred or distributed; or (b) cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered. (2) The transmission of an asset by succession or under a will shall be treated as a disposal of the asset by the deceased at the time asset is transmitted. (3) The application of a business asset to personal use shall be treated as a disposal of the asset by the owner of the asset at the time the asset is so applied. 1[(3A) Where a business asset is discarded or ceases to be used in business, it shall be treated to have been disposed of.] (4) A disposal shall include the disposal of a part of an asset. (5) A person shall be treated as having acquired an asset at the time the person begins to own the asset, including at the time the person is granted any right. (6) The application of a personal asset to business use shall be treated as an acquisition of the asset by the owner at the time the asset is so applied. (7) In this section, - “business asset” means an asset held wholly or partly for use in a business, including stock-in-trade and a depreciable asset; and “personal asset” means an asset held wholly for personal use. 76. Cost.- (1) Except as otherwise provided in this Ordinance, this section shall establish the cost of an asset for the purposes of this Ordinance. (2) Subject to sub-section (3), the cost of an asset purchased by a person shall be the sum of the following amounts, namely:– (a) The total consideration given by the person for the asset, including the fair market value of any consideration in kind determined at the time the asset is acquired; (b) any incidental expenditure incurred by the person in acquiring and disposing of the asset; and (c) any expenditure incurred by the person to alter or improve the asset, but shall not include any expenditure under clauses (b) and (c) that has been fully allowed as a deduction under this Ordinance. (3) The cost of an asset treated as acquired under sub-section (6) of section 75 shall be the fair market value of the asset determined at the date it is applied to business use. (4) The cost of an asset produced or constructed by a person shall be the total costs incurred by the person in producing or constructing the asset plus any expenditure referred to 1[in] clauses (b) and (c) of sub-section (2) incurred by the person. 1 Sub-section (3A) inserted by Finance Act, 2003 2010 – 2011 65 The Income Tax Ordinance, 2001 (5) Where an asset has been acquired by a person with a loan denominated in a foreign currency and, before full and final repayment of the loan, there is an increase or decrease in the liability of the person under the loan as expressed in Rupees, the amount by which the liability is increased or reduced shall be added to or deducted from the cost of the asset, as the case may be. 2[Explanation.- Difference, if any, on account of foreign currency fluctuation, shall be taken into account in the year of occurrence for the purposes of depreciation.] (6) In determining whether the liability of a person has increased or decreased for the purposes of sub-section (5), account shall be taken of the person’s position under any hedging agreement relating to the loan. (7) Where a part of an asset is disposed of by a person, the cost of the asset shall be apportioned between the part of the asset retained and the part disposed of in accordance with their respective fair market values determined at the time the person acquired the asset. (8) Where the acquisition of an asset by a person is the derivation of an amount chargeable to tax, the cost of the asset shall be the amount so charged plus any amount paid by the person for the asset. (9) Where the acquisition of an asset by a person is the derivation of an amount exempt from tax, the cost of the asset shall be the exempt amount plus any amount paid by the person for the asset. (10) The cost of an asset does not include the amount of any grant, subsidy, rebate, commission or any other assistance (other than a loan repayable with or without profit) received or receivable by a person in respect of the acquisition of the asset, except to the extent to which the amount is chargeable to tax under this Ordinance. 77. Consideration received.- (1) The consideration received by a person on disposal of an asset shall be the total amount received by the person for the asset 3[or the fair market value thereof, whichever is the higher], including the fair market value of any consideration received in kind determined at the time of disposal. (2) Where an asset has been lost or destroyed by a person, the consideration received for the asset shall include any compensation, indemnity or damages received by the person under – (a) an insurance policy, indemnity or other agreement; (b) a settlement; or (c) a judicial decision. (3) The consideration received for an asset treated as disposed of under sub-section (3) 4[or (3A)] of section 75 shall be the fair market value of the asset determined at the time it is applied to personal use 5[or discarded or ceased to be used in business, as the case may be]. (4) The consideration received by a scheduled bank, financial institution, modaraba, or leasing company approved by the Commissioner (hereinafter referred to as a “leasing company”) in respect of an Inserted by Finance Act, 2003 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ADJUSTMENT IN COST OF ASSETS ACQUIRED THROUGH FOREIGN CURRENCY LOAN. [Section 76(5)] Sub-Section (5) of section 76 of the Ordinance provide for determination of cost of assets purchased through Foreign Currency Loan. It has been noticed that the tax payers take undue benefit of the devaluation of Pakistani currency and claim initial as well as normal depreciation by upward revising the Written Down Value (WDV) which also leads to litigation in the matter. In order to rectify this ambiguous situation an Explanation has been added to the said sub section providing that for the purposes of depreciation, the difference if any on account of Foreign Currency fluctuation is now to be taken into account only in year of occurrence of such fluctuation and WDV adopted in previous year will not be altered. Explanation added vide the Finance Act, 2009. 3 Inserted by Finance Act, 2003 4 Inserted by Finance Act, 2003 5 Inserted by Finance Act, 2003 1 2010 – 2011 66 The Income Tax Ordinance, 2001 asset leased by the company to another person shall be the residual value received by the leasing company on maturity of the lease agreement subject to the condition that the residual value plus the amount realised during the term of the lease towards the cost of the asset is not less than the original cost of the asset. (5) Where two or more assets are disposed of by a person in a single transaction and the consideration received for each asset is not specified, the total consideration received by the person shall be apportioned among the assets disposed of in proportion to their respective fair market values determined at the time of the transaction. 78. Non-arm’s length transactions.- Where an asset is disposed of in a non-arm’s length transaction – (a) the person disposing of the asset shall be treated as having received consideration equal to the fair market value of the asset determined at the time the asset is disposed; and (b) the person acquiring the asset shall be treated as having a cost equal to the amount determined under clause (a). 79. Non-recognition rules.- (1) For the purposes of this Ordinance and subject to sub-section (2), no gain or loss shall be taken to arise on the disposal of an asset (a) between spouses under an agreement to live apart; (b) by reason of the transmission of the asset to an executor or beneficiary on the death of a person; (c) by reason of a gift of the asset; (d) by reason of the compulsory acquisition of the asset under any law where the consideration received for the disposal is reinvested by the recipient in an asset of a like kind within one year of the disposal; (e) by a company to its shareholders on liquidation of the company; or (f) by an association of persons to its members on dissolution of the association where the assets are distributed to members in accordance with their interests in the capital of the association. (2) Sub-section (1) shall not apply where the person acquiring the asset is a non-resident person at the time of the acquisition. (3) Where clause (a), (b), (c), (e) or (f) of sub-section (1) applies, the person acquiring the asset shall be treated as – (a) acquiring an asset of the same character as the person disposing of the asset; and (b) acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset at the time of the disposal. (4) The person’s cost of a replacement asset referred to in clause (d) of sub-section (1) shall be the cost of the asset disposed of plus the amount by which any consideration given by the person for the replacement asset exceeds the consideration received by the person for the asset disposed of. 2010 – 2011 67 The Income Tax Ordinance, 2001 CHAPTER V PROVISIONS GOVERNING PERSONS PART I CENTRAL CONCEPTS Division I Persons 80. Person.- (1) The following shall be treated as persons for the purposes of this Ordinance, namely:– (a) An individual; (b) a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere; (c) the Federal Government, a foreign government, a political subdivision of a foreign government, or public international organisation. 1(2) For the purposes of this Ordinance – (a) “association of persons” includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company; (b) “company” means – (i) a company as defined in the Companies Ordinance, 1984 (XLVII of 1984); (ii) a body corporate formed by or under any law in force in Pakistan; (iii) a modaraba; (iv) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies; (v) a trust, a co-operative society or a finance society 2[or any other society established or constituted by or under any law for the time being in force;] (vi) a foreign association, whether incorporated or not, which the Federal Board of Revenue has, by general or special order, declared to be a company for the purposes of this Ordinance; (vii) a Provincial Government; 3[ ] (viii) a 4[Local Government] in Pakistan; 5[or] 6[(ix) a Small Company as defined in section 2;] EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008RATIONALIZATION OF TAX RATE ON INCOME OF COOPERATIVE SOCIETIES. [Section 80(2)]. A Cooperative Society is defined under section 80(2) of the Ordinance as “company”. However, a separate rate of tax was provided in the paragraph (ii) of Division II of Part I of the First Schedule to the Ordinance, whereby income of a finance society, a cooperative society or any other society was chargeable to tax at the rates applicable to a company or an individual whichever was beneficial to the taxpayer. 8.2 The said paragraph (ii) of the aforesaid Division/Part of the said Schedule has been omitted. Now the cooperative society or any other society covered by the definition of a “company” shall be taxed at the same rate as is applicable to a company. 2 Inserted by the Finance Ordinance, 2002 3 The word “or” omitted by the Finance Act, 2005. 4 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 5 Inserted by the Finance Act, 2005. 6 Added by the Finance Act, 2005. 1 2010 – 2011 68 The Income Tax Ordinance, 2001 (c) “firm” means the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all; (d) “trust” means an obligation annexed to the ownership of property and arising out of the confidence reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of another, or of another and the owner, and includes a unit trust; and (e) “unit trust” means any trust under which beneficial interests are divided into units such that the entitlements of the beneficiaries to income or capital are determined by the number of units held. Division II Resident and Non-Resident Persons 81. Resident and non-resident persons.- (1) A person shall be a resident person for a tax year if the person is – (a) a resident individual, resident company or resident association of persons for the year; or (b) the Federal Government. (2) A person shall be a non-resident person for a tax year if the person is not a resident person for that year. Â 82. Resident individual.- An individual shall be a resident individual for a tax year if the individual – (a) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and 1[eightythree] days or more in the tax year; 2[or] 3[ ] (c) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year. 83. Resident company.- A company shall be a resident company for a tax year if – (a) it is incorporated or formed by or under any law in force in Pakistan; (b) the control and management of the affairs of the company is situated wholly 4[ ]in Pakistan at any time time in the year; or (c) it is a Provincial Government or 5[Local Government] in Pakistan. 84. Resident association of persons.- An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year. Â Income Tax Cir. No. 1 dated the 1st July, 2006 RESIDENTIAL STATUS. [Section 82] The law provides a minimum period of 182 days to qualify as a resident. It has been opined that since a leap year consists of 366 days, an individual can be a resident of two countries at the same time which can create tax complications. For the removal of any distortion which may arise, the time period of 182 days has been changed to 183 days for the determination of residential status of an individual person. 1 Words substituted for “eighty-two” by the Finance Act, 2006. 2 Inserted by the Finance Act, 2005. 3 Clause (b) omitted by Finance Act, 2003, read as follows: “(b) is present in Pakistan for a period of, or periods amounting in aggregate to, ninety days or more in the tax year and who, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixtyfive days or more; or” 4 Words “or almost wholly” omitted by Finance Act, 2003 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 2010 – 2011 69 The Income Tax Ordinance, 2001 Division III Associates 85. Associates.- (1) Subject to sub-section (2), two persons shall be associates where the relationship between the two is such that one may reasonably be expected to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person. (2) Two persons shall not be associates solely by reason of the fact that one person is an employee of the other or both persons are employees of a third person. (3) Without limiting the generality of sub-section (1) and subject to sub-section (4), the following shall be treated as associates – (a) an individual and a relative of the individual; (b) members of an association of persons; (c) a member of an association of persons and the association, where the member, either alone or together with an associate or associates under another application of this section, controls fifty per cent or more of the rights to income or capital of the association; (d) a trust and any person who benefits or may benefit under the trust; (e) a shareholder in a company and the company, where the shareholder, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons – (i) fifty per cent or more of the voting power in the company; (ii) fifty per cent or more of the rights to dividends; or (iii) fifty per cent or more of the rights to capital; and (f) two companies, where a person, either alone or together with an associate or associates under another application of this section, controls either directly or through one or more interposed persons – (i) fifty per cent or more of the voting power in both companies; (ii) fifty per cent or more of the rights to dividends in both companies; or (iii) fifty per cent or more of the rights to capital in both companies. (4) Two persons shall not be associates under clause (a) or (b) of sub-section (3) where the Commissioner is satisfied that neither person may reasonably be expected to act in accordance with the intentions of the other. (5) In this section, “relative” in relation to an individual, means – (a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or (b) a spouse of the individual or of any person specified in clause (a). 2010 – 2011 70 The Income Tax Ordinance, 2001 PART II INDIVIDUALS Division I Taxation of Individuals 86. Principle of taxation of individuals.- Subject to this Ordinance, the taxable income of each individual shall be determined separately. 87. Deceased individuals.- (1) The legal representative of a deceased individual shall be liable for – (a) any tax that the individual would have become liable for if the individual had not died; and (b) any tax payable in respect of the income of the deceased’s estate. (2) The liability of a legal representative under this section shall be limited to the extent to which the deceased’s estate is capable of meeting the liability. 1[(2A) The liability under this Ordinance shall be the first charge on the deceased‘s estate.] (3) For the purpose of this Ordinance, – (a) any proceeding taken under this Ordinance against the deceased before his or her death shall be treated as taken against the legal representative and may be continued against the legal representative from the stage at which the proceeding stood on the date of the deceased’s death; and (b) any proceeding which could have been taken under this Ordinance against the deceased if the deceased had survived may be taken against the legal representative of the deceased. (4) In this section, “legal representative” means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in representative character the person on whom the estate devolves on the death of the party so suing or sued. Division II Provisions Relating to Averaging 88. An individual as a member of an association of persons.- If, for a tax year, an individual has taxable income and derives an amount or amounts exempt from tax under sub-section (1) of section 92, the amount of tax payable on the taxable income of the individual shall be computed in accordance with the following formula, namely:– (A/B) x C where – A is the amount of tax that would be assessed to the individual for the year if the amount or amounts exempt from tax under sub-section (1) of section 92 were chargeable to tax; B is the taxable income of the individual for the year if the amount or amounts exempt from tax under sub-section (1) of section 92 were chargeable to tax; and Sub-section (2) inserted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 FIRST CHARGE ON ESTAE OF THE DECEASED INDIVIDUAL. [Section 87(2A)]. Through Finance Act, 2010, a new sub-section (2A) in section 87 of the Income Tax Ordinance, 2001, has been inserted whereby any liability under the Income Tax Ordinance, 2001, outstanding against a deceased person shall be the first charge on the estate of such deceased person, in preference to any other outstanding liability of the deceased. 1 2010 – 2011 C 71 The Income Tax Ordinance, 2001 is the individual’s actual taxable income for the year. 1[88A. Share profits of company to be added to taxable income.- (1) Notwithstanding the provisions of sub-section (1) of section 92, the share of profits derived by a company from an association of persons shall be added to the taxable income of the company. (2) The company shall be allowed a tax credit in accordance with the following formula, namely:2[(A/B) x C] Where – A is the amount of share of profits received by the company from the association; B is the taxable income of the association; and C is the amount of tax assessed on the association. (3) The tax credit allowed under this section shall be applied in accordance with sub-section (3) of section 4.] 89. Authors.- Where the time taken by an author of a literary or artistic work to complete the work exceeds twenty-four months, the author may elect to treat any lump sum amount received by the author in a tax year on account of royalties in respect of the work as having been received in that tax year and the preceding two tax years in equal proportions. Division III Income Splitting 90. Transfers of assets.- (1) For the purposes of this Ordinance and subject to sub-section (2), where there has been a revocable transfer of an asset, any income arising from the asset shall be treated as the income of the transferor and not of the transferee. (2) Sub-section (1) shall not apply to any income derived by a person by virtue of a transfer that is not revocable during the lifetime of the person and the transferor derives no direct or indirect benefit from such income. (3) For the purposes of this Ordinance, where there has been a transfer of an asset but the asset remains the property of the transferor, any income arising from the asset shall be treated as the income of the transferor. (4) For the purposes of this Ordinance and subject to sub-section (5), any income arising from any asset transferred by a person directly or indirectly to – (a) the person’s spouse or minor child; or (b) any other person for the benefit of a person or persons referred to in clause (a), shall be treated as the income of the transferor. (5) Sub-section (4) shall not apply to any transfer made – (a) for adequate consideration; or (b) in connection with an agreement to live apart. 1 2 Sec 88A. inserted by Finance Act, 2003 The brackets, figure and letters “(A/B)XC” substituted by the Finance Act, 2005. 2010 – 2011 72 The Income Tax Ordinance, 2001 (6) For the purposes of clause (a) of sub-section (5), a transfer shall not be treated as made for adequate consideration if the transferor has provided, by way of loan or otherwise, to the transferee, directly or indirectly, with the funds for the acquisition of the asset. (7) Sub-section (5) does not apply where the transferor fails to produce evidence of the transfer of the asset by way of its registration or mutation in the relevant record and the income arising from the asset shall be treated as the income of the transferor for the purposes of this Ordinance. (8) For the purposes of this section, – (a) a transfer of an asset shall be treated as revocable if – (i) there is any provision for the re-transfer, directly or indirectly, of the whole or any part of the asset to the transferor; or (ii) the transferor has, in any way, the right to resume power, directly or indirectly, over the whole or any part of the asset; (b) “minor child” shall not include a married daughter; and (c) “transfer” includes any disposition, settlement, trust, covenant, agreement or arrangement. 91. Income of a minor child.- (1) Any income of a minor child for a tax year chargeable under the head "Income from Business" shall be chargeable to tax as the income of the parent of the child with the highest taxable income for that year. (2) Sub-section (1) shall not apply to the income of a minor child from a business acquired by the child through an inheritance. PART III ASSOCIATIONS OF PERSONS 92. Ð Principles of taxation of associations of persons.- (1) [1]An association of persons shall be liable to tax separately from the members of the association and 2[where the association of persons has paid tax the] amount received by a member of the association in the capacity as member out of the income of the association shall be exempt from tax. [3] 4[93.] Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. CHANGE IN ASSESSMENT REGIME FOR PROFESSIONAL FIRMS. [Sections 92 & 93] An AOP is liable to tax separately from its members. Where AOP has paid tax, the amount received by a member of the association, in the capacity as member, out of the income of the association is exempt from tax. An AOP being a professional firm such as firm providing legal and advisory services through professional skills of the partners and which are prohibited from incorporation by any law or rules of the body regulating the profession, was however, not liable to tax. Partners of such firm instead individually pay tax on their respective share of income from the firm. In order to bring professional firms at par with other AOPs, sub-sections (2) to (5) of section 92 and section 93 have been omitted. Consequently, professional firms shall be liable to tax at par with other AOPs. This amendment will be applicable, where income of the professional firm is derived from July 01, 2007 onwards. 1 Words, brackets, figure and comma “Subject to sub-section (2),” omitted by the Finance Act, 2007. 2 Substituted for “any” by Finance Act, 2003. 3 Sub sections (2), (3), (4) and (5) omitted by the Finance Act, 2007, the omitted clauses read as follows: 3[(2) Sub-section (1) shall not apply to an association of persons that is a professional firm prohibited from incorporating by any law or the rules of the body regulating the profession. (3) An association of persons to which subsection (2) applies shall not be liable to tax and the income of the association shall be taxed to the members in accordance with section 93. (4) An association of persons referred to in sub-section (3) shall furnish a return of total income for each tax year. (5) Sections 114, 118 and 119 shall apply to a return of total income required to be furnished under sub-section (4). 3 Substituted for “(2)Sub-section (1) shall not apply to – (a) an association of persons that is a professional firm prohibited from incorporating by any law or the rules of the body regulating the profession; or (b) an association of persons in which a company is a member.” By Finance Act, 2003 4 Section 93 omitted by the Finance Act, 2007, the omitted section read as follows: - 2010 – 2011 73 The Income Tax Ordinance, 2001 PART IV COMPANIES 94. Principles of taxation of companies.- (1) shareholders. (2) A company shall be liable to tax separately from its A dividend paid by a resident company shall be taxable in accordance with Section 5. (3) A dividend paid by a non-resident company to a resident person shall be chargeable to tax under the head “Income from Business” or “Income from Other Sources”, as the case may be, unless the dividend is exempt from tax. 95. Disposal of business by individual to wholly-owned company.- (1) Where a resident individual (hereinafter referred to as the “transferor”) disposes of all the assets of a business of the transferor to a resident company, no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:– (a) The consideration received by the transferor for the disposal is a share or shares in the company (other than redeemable shares); (b) the transferor must beneficially own all the issued shares in the company immediately after the disposal; (c) the company must undertake to discharge any liability in respect of the assets disposed of to the company; (d) any liability in respect of the assets disposed of to the company must not exceed the transferor’s cost of the assets at the time of the disposal; (e) the fair market value of the share or shares received by the transferor for the disposal must be substantially the same as the fair market value of the assets disposed of to the company, less any liability that the company has undertaken to discharge in respect of the assets; and (f) the company must not be exempt from tax for the tax year in which the disposal takes place. (2) Where sub-section (1) applies – (a) each of the assets acquired by the company shall be treated as having the same character as it had in the hands of the transferor; 93. Taxation of members of an association of persons.- (1) Where sub-section (3) of section 92 applies, the income of a member of an association of persons chargeable under the head “Income from Business” for a tax year shall include – (a) in the case of a resident member, the member’s share in the total income of the association; or (b) in the case of a non-resident member, the member’s share in so much of the total income of the association as is attributable to Pakistani-source income. (2) Where an association of persons to which sub-section (3) of section 92 applies sustains a loss that cannot be set off against any other income of the association in accordance with section 56, the amount of the loss shall be apportioned among the members of the association according to their interest in the association and the members shall be entitled to have their share of the loss set off and carried forward for set off under Part VIII of Chapter III in computing their taxable income under this Ordinance. (3) The share of a loss referred to in sub-section (2) of a non-resident member shall be limited to the extent that the loss relates to the derivation of Pakistan-source income. (4) The total income of an association of persons for the purposes of sub-section (1) and the loss of an association for the purposes of sub-section (2) shall be computed as if the association were a resident person. (5) Income, expenditures and losses of an association of persons to which this section applies shall retain their character as to geographic source and type of income, expenditure or loss in the hands of the members of the association, and shall be treated as having passed through the association on a pro rata basis, unless the Commissioner permits otherwise by 4[order] in writing to the association. (6) The share of a member in the total income of an association of persons shall be determined according to the member’s interest in the association and shall include any profit on debt, brokerage, commission, salary or other remuneration received or due from the association. 4 Substituted for “notice” by Finance Act, 2003 2010 – 2011 74 The Income Tax Ordinance, 2001 (b) the company’s cost in respect of the acquisition of the assets shall be – (i) in the case of a depreciable asset or amortised intangible, the written down value of the asset or intangible immediately before the disposal; (ii) in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35[1], that value; or (iii) in any other case, the transferor’s cost at the time of the disposal; (c) if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the assets transferred which have not been set off against the transferor’s income, the amount not set off shall be added to the deductions allowed under those sections to the company in the tax year in which the transfer is made; and (d) the transferor’s cost in respect of the share or shares received as consideration for the disposal shall be – (i) in the case of a consideration of one share, the transferor’s cost of the assets transferred as determined under clause (b), less the amount of any liability that the company has undertaken to discharge in respect of the assets; or (ii) in the case of a consideration of more than one share, the amount determined under sub-clause (i) divided by the number of shares received. (3) In determining whether the transferor’s deductions under sections 22, 23 or 24 have been set off against income for the purposes of clause (c) of sub-section (2), those deductions shall be taken into account last. 96. Disposal of business by association of persons to wholly-owned company.- (1) Where a resident association of persons disposes of all the assets of a business of the association to a resident company, no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:– (a) The consideration received by the association for the disposal is a share or shares in the company (other than redeemable shares); (b) the association must own all the issued shares in the company immediately after the disposal; (c) each member of the association must have an interest in the shares in the same proportion to the member’s interest in the business assets immediately before the disposal; (d) the company must undertake to discharge any liability in respect of the assets disposed of to the company; (e) any liability in respect of the assets disposed of to the company must not exceed the association’s cost of the asset at the time of the disposal; (f) the fair market value of the share or shares received by the association for the disposal must be substantially the same as the fair market value of the assets disposed of to the company, as reduced by any liability that the company has undertaken to discharge in respect of the assets; and (g) the company must not be exempt from tax for the tax year in which the disposal takes place. (2) Where sub-section (1) applies – (a) each of the assets acquired by the company shall be treated as having the same character as it had in the hands of the association; 1 Words “at fair market value” omitted by the Finance Act, 2007. 2010 – 2011 75 The Income Tax Ordinance, 2001 (b) the company’s cost in respect of the acquisition of the assets shall be – (i) in the case of a depreciable asset or amortised intangible, the written down value of the asset or intangible immediately before the disposal; (ii) in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35[1], that value; or (iii) in any other case, the association’s cost at the time of the disposal; (c) if, immediately before the disposal, the association is subject to tax in accordance with sub-section (1) of section 92 and the association has deductions allowed under sections 22, 23 and 24 in respect of the assets transferred which have not been set off against the association’s income, the amount not set off shall be added to the deductions allowed under those sections to the company in the tax year in which the transfer is made; and (d) the association’s cost in respect of the share or shares received as consideration for the disposal shall be – (i) in the case of a consideration of one share, the association’s cost of the assets transferred as determined under clause (b), as reduced by the amount of any liability that the company has undertaken to discharge in respect of the assets; or (ii) in the case of a consideration of more than one share, the amount determined under sub-clause (i) divided by the number of shares received. (3) In determining whether the association’s deductions under Sections 22, 23 or 24 have been set off against income for the purposes of clause (c) of sub-section (2), those deductions are taken into account last. 97. Disposal of asset between wholly-owned companies.- (1) Where a resident company (hereinafter referred to as the “transferor”) disposes of an asset to another resident company (hereinafter referred to as the “transferee”), no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:(a) Both 2[resident] companies belong to a wholly-owned group of companies at the time of the disposal; (b) the transferee must undertake to discharge any liability in respect of the asset acquired; (c) any liability in respect of the asset must not exceed the transferor’s cost of the asset at the time of the disposal; and (d) the transferee must not be exempt from tax for the tax year in which the disposal takes place. (2) Where sub-section (1) applies – (a) the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor; (b) the transferee’s cost in respect of the acquisition of the asset shall be – (i) in the case of a depreciable asset or amortised intangible, the written down value of the asset or intangible immediately before the disposal; (ii) in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35[3], that value; or Words “at fair market value” omitted by the Finance Act, 2007. Inserted by Finance Act, 2003 3 Words “at fair market value” omitted by the Finance Act, 2007. 1 2 2010 – 2011 76 The Income Tax Ordinance, 2001 (iii) in any other case, the transferor’s cost at the time of the disposal; (c) if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor’s income, the amount not set off shall be added to the deductions allowed under those sections to the transferee in the tax year in which the transfer is made; and (d) the transferor’s cost in respect of any consideration in kind received for the asset shall be the transferor’s cost of the asset transferred as determined under clause (b), as reduced by the amount of any liability that the transferee has undertaken to discharge in respect of the asset. (3) In determining whether the transferor’s deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of sub-section (2), those deductions shall be taken into account last. (4) The transferor and transferee companies belong to a wholly-owned group if – (a) one company beneficially holds all the issued shares of the other company; or (b) a third company beneficially holds all the issued shares in both companies. 1[97A. ÐDisposal of asset under a scheme of arrangement and reconstruction.—(1) No gain or loss shall be taken to arise on disposal of asset from one company (hereinafter referred to as the “transferor”) to another company (hereinafter referred to as the “transferee”) by virtue of operation of a Scheme of Arrangement and Reconstruction under sections 282L and 284 to 287 of the Companies Ordinance, 1984 (XLVII of 1984) or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962), if the following conditions are satisfied, namely:— (a) the transferee must undertake to discharge any liability in respect of the asset acquired; (b) any liability in respect of the asset must not exceed the transferor’s cost of the asset at the time of the disposal; (c) the transferee must not be exempt from tax for the tax year in which the disposal takes place; and (d) scheme is approved by the High Court, State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, on or after first day of July, 2007. (2) No gain or loss shall be taken to arise on issue, cancellation, exchange or receipt of shares as a result of scheme of arrangement and reconstruction under sections 282L and 284 to 287 of the companies Ordinance, 1984 (XLVII of 1984) or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962) and approved by:— Section 97A inserted by the Finance Act, 2007. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. MERGERS AND ACQUISITIONS. [Section 97A] A new section 97A has been inserted which envisages that no gain or loss shall arise on disposal of assets by one company to another company under a Scheme of Arrangement and Re-construction under sections 282L and 284 to 287 of the Companies Ordinance, 1984 or section 48 of the Banking Companies Ordinance, 1962. The other salient features of the Scheme are as follows: (i) No loss or gain shall be taken to arise on disposal of asset from one company to another company by virtue of Scheme of Arrangement and Reconstruction as approved by; (a) the High Court; (b) State Bank of Pakistan; or (c) the Securities and Exchange Commission of Pakistan, as the case may be; (ii) No loss or gain shall be taken to arise on issue, cancellation, exchange or receipt of shares as a result of Scheme of Arrangement and Reconstruction; (iii) In case of disposal of shares issued and vested under Scheme of Arrangement and Reconstruction, the cost of the shares shall be the cost prior to the operation of the scheme; and (iv) Scheme of Arrangement and Reconstruction, approved on or after 1st July 2007 is eligible for the benefits available under this section. 1 2010 – 2011 77 The Income Tax Ordinance, 2001 (a) the High Court; (b) State Bank of Pakistan; or (c) Securities and Exchange Commission of Pakistan, as the case may be, on or after first day of July, 2007. (3) Where sub-section (1) applies— (a) the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor; (b) the transferee’s cost in respect of acquisition of the asset shall be— (i) in the case of a depreciable asset or amortised intangible, the written down value of the asset or intangible immediately before the disposal; (ii) in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35 that value; or (iii) in any other case, the transferor’s cost at the time of the disposal; (c) if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor’s income, the amount not set off shall be added to the deduction allowed under those sections to the transferee in the tax year in which the transfer is made. (4) In determining whether the transferor’s deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of sub-section (2), those deductions shall be taken into account last. (5) Where sub-section (2) applies and the shares issued vested by virtue of the Scheme of Arrangement and Reconstruction under sections 282L and 284 to 287 of the Companies Ordinance, 1984 (XLVII of 1984) or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962) and approved by the Court or State Bank of Pakistan or Securities and Exchange Commission of Pakistan as the case may be, are disposed of, the cost of shares shall be the cost prior to the operation of the said scheme.] 2010 – 2011 78 The Income Tax Ordinance, 2001 PART V COMMON PROVISIONS APPLICABLE TO ASSOCIATIONS OF PERSONS AND COMPANIES 98. Change in control of an entity.- (1) Where there is a change of fifty per cent or more in the underlying ownership of an entity, any loss incurred for a tax year before the change shall not be allowed as a deduction in a tax year after the change, unless the entity – (a) continues to conduct the same business after the change as it conducted before the change until the loss has been fully set off; and (b) does not, until the loss has been fully set off, engage in any new business or investment after the change where the principal purpose of the entity or the beneficial owners of the entity is to utilise the loss so as to reduce the income tax payable on the income arising from the new business or investment. (2) In this section, – “entity” means a company or association of persons to which sub-section (1) of section 92 applies; “ownership interest” means a share in a company or the interest of a member in an association of persons; and “underlying ownership” in relation to an entity, means an ownership interest in the entity held, directly or indirectly through an interposed entity or entities, by an individual or by a person not ultimately owned by individuals. 2010 – 2011 The Income Tax Ordinance, 2001 79 1[PART VA TAX LIABILITY IN CERTAIN CASES 98A. Change in the constitution of an association of persons.- Where, during the course of a tax year, a change occurs in the constitution of an association of persons, liability of filing the return on behalf of the association of persons for the tax year shall be on the association of persons as constituted at the time of filing such return but the income of the association of persons shall be apportioned among the members who were entitled to receive it and, where the tax assessed on a member cannot be recovered from him it shall be recovered from the association of persons as constituted at the time of filing the return. 98B. Discontinuance of business or dissolution of an association of persons.- (1) Subject to the provisions of section 117, where any business or profession carried on by an association of persons has been discontinued, or where an association of persons is dissolved, all the provisions of this Ordinance, shall, so far as may be, apply as if no such discontinuance or dissolution had taken place. (2) Every person, who was, at the time of such discontinuance or dissolution, a member of such association of persons and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax payable by the association of persons. 98C. Succession to business, otherwise than on death.- (1) Where a person carrying on any business or profession has been succeeded in any tax year by any other person (hereafter in this section referred to as the “predecessor” and “successor” respectively), otherwise than on the death of the predecessor, and the successor continues to carry on that business or profession,(a) the predecessor shall be liable to pay tax in respect of the income of the tax year in which the succession took place up to the date of succession and of the tax year or years preceding that year; and (b) the successor shall be liable to pay tax in respect of the income of such tax year after the date of succession. (2) Notwithstanding anything contained in sub-section (1), where the predecessor cannot be found, the tax liability in respect of the tax year in which the succession took place up to the date of succession and of the tax year or years preceding that year shall be that of the successor in like manner and to the same extent as it would have been that of the predecessor, and all the provisions of this Ordinance shall, so far as may be, apply accordingly. (3) Where any tax payable under this section in respect of such business or profession cannot be recovered from the predecessor, it shall be recoverable from the successor, who shall be entitled to recover it from the predecessor.] 1 Part VA inserted by Finance Act, 2003 2010 – 2011 80 The Income Tax Ordinance, 2001 CHAPTER VI SPECIAL INDUSTRIES PART I INSURANCE BUSINESS 99. Special provisions relating to insurance business.- The profits and gains of any insurance business shall be computed in accordance with the rules in the Fourth Schedule. PART II OIL, NATURAL GAS AND OTHER MINERAL DEPOSITS 100. Special provisions relating to the production of oil and natural gas, and exploration and extraction of other mineral deposits.- (1) Subject to sub-section (2), the profits and gains from – (a) the exploration and production of petroleum including natural gas and from refineries set up at the Dhodak and Bobi fields; (b) the pipeline operations of exploration and production companies; or (c) the manufacture and sale of liquified petroleum gas or compressed natural gas, and the tax payable thereon shall be computed in accordance with the rules in Part I of the Fifth Schedule. (2) Sub-section (1) shall not apply to the profits and gains attributable to the production of petroleum including natural gas discovered before the 24th day of September, 1954. (3) The profits and gains of any business which consists of, or includes, the exploration and extraction of such mineral deposits of a wasting nature (not being petroleum or natural gas) as may be specified in this behalf by the Federal Government carried on by a person in Pakistan shall be computed in accordance with the rules in Part II of the Fifth Schedule. 1[100A. ÓSpecial provisions relating to banking business.—(1) Subject to sub-section (2), the income, profits and gains of any banking company as defined in clause (7) of section 2 and tax payable thereon shall be computed in accordance with the rules in the Seventh Schedule. Section 100A inserted by the Finance, 2007 Ó EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. SEPARATE SCHEDULE FOR BANKING COMPANIES. [Section 100A – Seventh Schedule] For computation of income of the banking companies, a separate schedule has been provided by substituting the Seventh Schedule to the Income Tax Ordinance, 2001 as “Rules for computation of the profits and gains of a banking company and tax payable thereon”. The salient features of scheme as provided in the Seventh Schedule are as under: (i) a banking company’s income as disclosed in the annual accounts furnished to the State Bank of Pakistan, subject to specified adjustments, shall be taken as “Income from Business”; (ii) deductions for depreciation, initial allowance and amortization of intangibles shall be available in accordance with law [Sections 22, 23 and 24]; (iii) deductions shall be inadmissible if covered under section 21 of the Ordinance; (iv) gain or loss on disposal of depreciable asset shall be computed in accordance with law [Section 22(8)]; (v) provisions of law relating to disposal and acquisition of asset shall be applied to make adjustments [Sections 68 to 79]; (vi) provision for classified advances and off balance sheet items shall be allowed as claimed in the accounts, provided a certificate from the external auditors is furnished by the banking company to the effect that such provisions are in line with the requirements of Prudential Regulations; (vii) expense charged in the accounts in respect of a debt classified as ‘substandard’ under Prudential Regulations shall not be allowed as deduction. However, if such debt is re-classified as ‘doubtful’ or ‘loss’ subsequently, a deduction shall be allowed for the amount disallowed being ‘substandard’. Further, reversal of provision in respect of a substandard debt, which was disallowed earlier, shall not be taken as income; (viii) adjustments made in the accounts due to application of International Accounting Standards 39 and 40 and consequently any gain or loss arising, shall be excluded while computing the income of the banking companies; (ix) liabilities, against which deduction was allowed, if remain unpaid for 3 years shall be added in the first tax year following the end of the 3 tax years. Payment of such liability shall however be allowed as deduction in the year of the payment; (x) gain or loss on sale of shares of listed securities shall be dealt separately: 1 2010 – 2011 81 The Income Tax Ordinance, 2001 (2) Sub-section (1) shall apply to the profits and gains of the banking companies relevant to tax year 2009 and onwards.] CHAPTER VII INTERNATIONAL PART I GEOGRAPHICAL SOURCE OF INCOME 101. Geographical source of income.- (1) Salary shall be Pakistan-source income to the extent to which the salary – (a) is received from any employment exercised in Pakistan, wherever paid; or (b) is paid by, or on behalf of, the Federal Government, a Provincial Government, or a 1[Local Government] in Pakistan, wherever the employment is exercised. (2) Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan. (3) Business income of a non-resident person shall be Pakistan-source income to the extent to which it is directly or indirectly attributable to – (a) a permanent establishment of the non-resident person in Pakistan; (b) sales in Pakistan of goods or merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan; 2[ ] (c) other business activities carried on in Pakistan of the same or similar kind as those effected by the nonresident through a permanent establishment in Pakistan3[; or (d) any business connection in Pakistan.] 4[(4) Where the business of a non-resident person comprises the rendering of independent services (including professional services and the services of entertainers and sports persons), the Pakistan-source (a) loss on sale of shares of listed companies, disposed of within oneyear of the date of acquisition, shall be adjustable against business income of the tax year; (b) where such loss is not fully set-off against business income during the tax year, it shall be carried forward to the following tax year and set-off against capital gain only; and (c) no loss shall be carried forward for more than 6 years immediately succeeding the tax year for which the loss was first computed; (xi) any special treatment for ‘Shariah Compliant Banking’ approved by the State Bank of Pakistan shall not be provided for any reduction or addition to income and tax liability. A statement, certified by the auditors of the banking company, shall be attached to the return of income to disclose the comparative position of transaction as per Islamic mode of financing and as per normal accounting principles. Adjustment shall be made to take into account treatment under normal accounting principles; (xii) foreign banks shall be allowed deduction for head office expenditure in the ratio of gross receipts of permanent establishment to world gross receipts, provided that expenditure is: (i) charged in the books of accounts of the permanent establishment; and (ii) a certificate from the external auditors is provided to the effect that the claim of such expenditure: (a) has been made in accordance with the provisions of this rule; and (b) is reasonable in relation to the operation of permanent establishment in Pakistan. (xiii) Federal Government has been empowered to amend, or modify or omit any entry in this schedule. (xiv) special provisions relating to banking business (section 100A) shall apply to the profit and gains of the banking companies relevant to tax year 2009 and onwards. 1 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 2 Word “or” omitted by Finance Act, 2003 3 Inserted by Finance Act, 2003 4 Substituted for “(4) Where the business of a non-resident person comprises the rendering of independent services (including professional services and the services of entertainers and sportspersons), the Pakistan-source business income of the person shall include (in addition to any amounts treated as Pakistan-source income under sub-section (3)) any remuneration derived by the person where 2010 – 2011 82 The Income Tax Ordinance, 2001 business income of the person shall include [in addition to any amounts treated as Pakistan-source income under sub-section (3)] any remuneration derived by the person where the remuneration is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.] (5) Any gain from the disposal of any asset or property used in deriving any business income referred to in sub-section (2), (3) or (4) shall be Pakistan-source income. (6) A dividend shall be Pakistan-source income if it is paid by a resident company. (7) Profit on debt shall be Pakistan-source income if it is – (a) paid by a resident person, except where the profit is payable in respect of any debt used for the purposes of a business carried on by the resident outside Pakistan through a permanent establishment; or (b) borne by a permanent establishment in Pakistan of a non-resident person. (8) A royalty shall be Pakistan-source income if it is – (a) paid by a resident person, except where the royalty is payable in respect of any right, property, or information used, or services utilised for the purposes of a business carried on by the resident outside Pakistan through a permanent establishment; or (b) borne by a permanent establishment in Pakistan of a non-resident person. (9) Rental income shall be Pakistan-source income if it is derived from the lease of immovable property in Pakistan whether improved or not, or from any other interest in or over immovable property, including a right to explore for, or exploit, natural resources in Pakistan. (10) Any gain from the alienation of any property or right referred to in sub-section (9) or from the alienation of any share in a company the assets of which consist wholly or principally, directly or indirectly, of property or rights referred to in sub-section (9) shall be Pakistan-source income. (11) A pension or annuity shall be Pakistan-source income if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person. (12) A technical fee shall be Pakistan-source income if it is – (a) paid by a resident person, except where the fee is payable in respect of services utilised in a business carried on by the resident outside Pakistan through a permanent establishment; or (b) borne by a permanent establishment in Pakistan of a non-resident person. (13) income. Any gain arising on the disposal of shares in a resident company shall be Pakistan-source 1[(13A). Any amount paid on account of insurance or re-insurance premium by an insurance company to an overseas insurance or re-insurance company shall be deemed to be Pakistan source income.] (14) Any amount not mentioned in the preceding sub-sections shall be Pakistan-source income if it is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person. (15) Where an amount may be dealt with under sub-section (3) and under another sub-section (other than sub-section (14)), this section shall apply – (a) the remuneration is paid by a resident person or borne by a permanent establishment in Pakistan of a nonresident; person; and (b) the aggregate gross amount (before deduction of expenses) of the remuneration is sixty thousand rupees or more.” By Finance Act, 2003 1 Sub-section 13A inserted by the Finance Act, 2008 2010 – 2011 83 The Income Tax Ordinance, 2001 (a) by first determining whether the amount is Pakistan-source income under that other sub-section; and (b) if the amount is not Pakistan-source income under that sub-section, then determining whether it is Pakistan-source income under sub-section (3). (16) income. An amount shall be foreign-source income to the extent to which it is not Pakistan-source PART II TAXATION OF FOREIGN-SOURCE INCOME OF RESIDENTS 102. Foreign source salary of resident individuals.- (1) Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary. (2) A resident individual shall be treated as having paid foreign income tax in respect of foreignsource salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue authority of the foreign country in which the employment was exercised. 103. Foreign tax credit.- (1) Where a resident taxpayer derives foreign source income chargeable to tax under this Ordinance in respect of which the taxpayer has paid foreign income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of – (a) the foreign income tax paid; or (b) the Pakistan tax payable in respect of the income. (2) For the purposes of clause (b) of sub-section (1), the Pakistan tax payable in respect of foreign source income derived by a taxpayer in a tax year shall be computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign-source income for the year. (3) Where, in a tax year, a taxpayer has foreign income under more than one head of income, this section shall apply separately to each head of income. (4) For the purposes of sub-section (3), income derived by a taxpayer from carrying on a speculation business shall be treated as a separate head of income. (5) The tax credit allowed under this section shall be applied in accordance with sub-section (3) of section 4. (6) Any tax credit or part of a tax credit allowed under this section for a tax year that is not credited under sub-section (3) of section 4 shall not be refunded, carried back to the preceding tax year, or carried forward to the following tax year. (7) A credit shall be allowed under this section only if the foreign income tax is paid within two years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer. (8) In this section, – “average rate of Pakistan income tax” in relation to a taxpayer for a tax year, means the percentage that the Pakistani income tax (before allowance of the tax credit under this section) is of the taxable income of the taxpayer for the year; “foreign income tax” includes a foreign withholding tax; and “net foreign-source income” in relation to a taxpayer for a tax year, means the total foreign-source income of the taxpayer charged to tax in the year, as reduced by any deductions allowed to the taxpayer under this Ordinance for the year that – 2010 – 2011 84 The Income Tax Ordinance, 2001 (a) relate exclusively to the derivation of the foreign-source income; and (b) are reasonably related to the derivation of foreign-source income in accordance with sub-section (1) of section 67 and any rules made for the purposes of that section. 104. Foreign losses.- (1) Deductible expenditures incurred by a person in deriving foreign-source income chargeable to tax under a head of income shall be deductible only against that income. (2) If the total deductible expenditures referred to in sub-section (1) exceed the total foreign source income for a tax year chargeable to tax under a head of income (hereinafter referred to as a “foreign loss”), the foreign loss shall be carried forward to the following tax year and set off against the foreign source income chargeable to tax under that head in that year, and so on, but no foreign loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was computed. (3) Where a taxpayer has a foreign loss carried forward for more than one tax year, the loss for the earliest year shall be set off first. (4) Section 67 shall apply for the purposes of this section on the basis that – (a) income from carrying on a speculation business is a separate head of income; and (b) foreign source income chargeable under a head of income (including the head specified in clause (a)) shall be a separate head of income. PART III TAXATION OF NON-RESIDENTS 105. Taxation of a permanent establishment in Pakistan of a non-resident person.- (1) The following principles shall apply in determining the income of a permanent establishment in Pakistan of a nonresident person chargeable to tax under the head “Income from Business”, namely:(a) The profit of the permanent establishment shall be computed on the basis that it is a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the non-resident person of which it is a permanent establishment; (b) subject to this Ordinance, there shall be allowed as deductions any expenses incurred for the purposes of the business activities of the permanent establishment including executive and administrative expenses so incurred, whether in Pakistan or elsewhere; (c) no deduction shall be allowed for amounts paid or payable by the permanent establishment to its head office or to another permanent establishment of the non-resident person (other than towards reimbursement of actual expenses incurred by the non-resident person to third parties) by way of: (i) royalties, fees or other similar payments for the use of any tangible or intangible asset by the permanent establishment; (ii) compensation for any services including management services performed for the permanent establishment; or (iii) profit on debt on moneys lent to the permanent establishment, except in connection with a banking business; and (d) no account shall be taken in the determination of the income of a permanent establishment of amounts charged by the permanent establishment to the head office or to another permanent establishment of the non-resident person (other than towards reimbursement of actual expenses incurred by the permanent establishment to third parties) by way of: 2010 – 2011 (i) 85 The Income Tax Ordinance, 2001 royalties, fees or other similar payments for the use of any tangible or intangible asset; (ii) compensation for any services including management services performed by the permanent establishment; or (iii) profit on debt on moneys lent by the permanent establishment, except in connection with a banking business. (2) No deduction shall be allowed in computing the income of a permanent establishment in Pakistan of a non-resident person chargeable to tax under the head “Income from Business” for a tax year for head office expenditure in excess of the amount as bears to the turnover of the permanent establishment in Pakistan the same proportion as the non-resident’s total head office expenditure bears to its worldwide turnover. (3) In this section, “head office expenditure” means any executive or general administration expenditure incurred by the non-resident person outside Pakistan for the purposes of the business of the Pakistan permanent establishment of the person, including – (a) any rent, local rates and taxes excluding any foreign income tax, current repairs, or insurance against risks of damage or destruction outside Pakistan; (b) any salary paid to an employee employed by the head office outside Pakistan; (c) any travelling expenditures of such employee; and (d) any other expenditures which may be prescribed. (4) No deduction shall be allowed in computing the income of a permanent establishment in Pakistan of a non-resident person chargeable under the head “Income from Business” for – (a) any profit paid or payable by the non-resident person on debt to finance the operations of the permanent establishment; or (b) any insurance premium paid or payable by the non-resident person in respect of such debt. 1106. Thin capitalisation.- (1) Where a foreign-controlled resident company (other than a financial institution 2[or a banking company 3[or a branch of a foreign company operating in Pakistan,)] has a foreign debt-to-foreign equity ratio in excess of three to one at any time during a tax year, a deduction shall be disallowed for the profit on debt paid by the company in that year on that part of the debt which exceeds the three to one ratio. (2) In this section, - “foreign-controlled resident company” means a resident company in which fifty per cent or more of the underlying ownership of the company is held by a non-resident person (hereinafter referred to as the “foreign controller”) either alone or together with an associate or associates; “foreign debt” in relation to a foreign-controlled resident company, means the greatest amount, at any time in a tax year, of the sum of the following amounts, namely:(a) The balance outstanding at that time on any debt obligation owed by the foreign-controlled resident company to a foreign controller or non-resident associate of the foreign controller on which profit on debt EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008APPLICATION OF THIN CAPITALIZATION RULE TO BRANCH OPERATION OF NON-RESIDENT COMPANIES. [Section 106]. Profit on foreign debt payable by a foreign controlled resident company in excess of three to one foreign debt equity ratio is not an admissible expense under section 106 of the Ordinance. However, there was no such restriction on branches of foreign companies not incorporated under Companies Ordinance, 1984. To provide level playing field to all operations of foreign companies “Thin Capitalization” rule has been made applicable to the branches of foreign companies operating in Pakistan. 2 Inserted by the Finance Ordinance, 2002 3 Words inserted by the Finance Act, 2008. 1 2010 – 2011 86 The Income Tax Ordinance, 2001 is payable which profit on debt is deductible to the foreign-controlled resident company and is not taxed under this Ordinance or is taxable at a rate lower than the 1[corporate rate] of tax applicable on assessment to the foreign controller or associate; and (b) the balance outstanding at that time on any debt obligation owed by the foreign-controlled resident company to a person other than the foreign controller or an associate of the foreign controller where that person has a balance outstanding of a similar amount on a debt obligation owed by the person to the foreign controller or a non-resident associate of the foreign controller; and “foreign equity” in relation to a foreign-controlled resident company and for a tax year, means the sum of the following amounts, namely:(a) The paid-up value of all shares in the company owned by the foreign controller or a non-resident associate of the foreign controller at the beginning of the tax year; (b) so much of the amount standing to the credit of the share premium account of the company at the beginning of the tax year as the foreign controller or a non-resident associate would be entitled to if the company were wound up at that time; and (c) so much of the accumulated profits and asset revaluation reserves of the company at the beginning of the tax year as the foreign controller or a non-resident associate of the foreign controller would be entitled to if the company were wound up at that time; reduced by the sum of the following amounts, namely:(i) The balance outstanding at the beginning of the tax year on any debt obligation owed to the foreigncontrolled resident company by the foreign controller or a non-resident associate of the foreign controller; and (ii) where the foreign-controlled resident company has accumulated losses at the beginning of the tax year, the amount by which the return of capital to the foreign controller or non-resident associate of the foreign controller would be reduced by virtue of the losses if the company were wound up at that time. PART IV AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION 107. Agreements for the avoidance of double taxation and prevention of fiscal evasion.- (1) The Federal Government may enter into an agreement with the government of a foreign country for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income imposed under this Ordinance and under the corresponding laws in force in that country, and may, by notification in the official Gazette make such provisions as may be necessary for implementing the agreement. (2) Where any agreement is made in accordance with sub-section (1), the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for – (a) relief from the tax payable under this Ordinance; (b) the determination of the Pakistan-source income of non-resident persons; (c) where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan; 1 Substituted for the words “corporate tax” by the Finance Ordinance, 2002 2010 – 2011 87 The Income Tax Ordinance, 2001 (d) the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and (e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country. (3) Notwithstanding anything in sub-sections (1) or (2), any agreement referred to in sub-section (1) may include provisions for the relief from tax for any period before the commencement of this Ordinance or before the making of the agreement. CHAPTER VIII ANTI-AVOIDANCE 108. Transactions between associates.- (1) The Commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm’s length transaction. (2) In making any adjustment under sub-section (1), the Commissioner may determine the source of income and the nature of any payment or loss as revenue, capital or otherwise. 109. Recharacterisation of income and deductions.- (1) For the purposes of determining liability to tax under this Ordinance, the Commissioner may – (a) recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme; (b) disregard a transaction that does not have substantial economic effect; or (c) recharacterise a transaction where the form of the transaction does not reflect the substance. (2) In this section, “tax avoidance scheme” means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person’s liability to tax under this Ordinance. 110. Salary paid by private companies.- Where, in any tax year, salary is paid by a private company to an employee of the company for services rendered by the employee in an earlier tax year and the salary has not been included in the employee’s salary chargeable to tax in that earlier year, the Commissioner may, if there are reasonable grounds to believe that payment of the salary was deferred, include the amount in the employee’s income under the head “Salary” in that earlier year. 111. Unexplained income or assets.- (1) Where – (a) any amount is credited in a person’s books of account; (b) a person has made any investment or is the owner of any money or valuable article; or (c) a person has incurred any expenditure, and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made or the explanation offered by the person is not, in the Commissioner’s opinion, satisfactory, the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person’s income chargeable to tax under head “Income from 1[Other Sources”] to the extent it is not adequately explained. 1 Substituted for the word “Business” by the Finance Ordinance, 2002 2010 – 2011 88 The Income Tax Ordinance, 2001 (2) The amount referred to in sub-section (1) shall be included in the person’s income chargeable to tax in the tax year 1[to which such amount relates]. 2[(3) Where the declared cost of any investment or valuable article or the declared amount of expenditure of a person is less than reasonable cost of the investment or the valuable article, or the reasonable amount of the expenditure, the Commissioner may, having regard to all the circumstances, include the difference in the person’s income chargeable to tax under the head “Income from Other Sources” in the tax year 3[to which the investment, valuable article or the expenditure relates].; and] 4[(4) Sub-section (1) does not apply,- (a) to any amount of foreign exchange remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect5[. (b) ] (5) section. The Federal Board of Revenue may make rules under section 6[237] for the purposes of this 112. Liability in respect of certain security transactions.- (1) Where the owner of any security disposes of the security and thereafter re-acquires the security and the result of the transaction is that any income payable in respect of the security is receivable by any person other than the owner, the income shall be treated, for all purposes of the Ordinance, as the income of the owner and not of the other person. (2) In this section, “security” includes 7[bonds, certificates, debentures,] stocks and shares. Substituted for “1[immediately preceding the financial year] in which it was discovered by the Commissioner”vide the Finance Act, 2010, 1 Inserted by the Finance Act, 2004. INCOME TAX Circular No. 10 dated the the July 16, 2010 UNEXPLAINED INCOME OR ASSETS [Section 111]. Under the existing provision of sub-section (2) of section 111 of the Income Tax Ordinance, 2001, any un-explained amount/investment, on discovery, was required to be added to the income of the taxpayer in the financial year preceding immediately to the year of such discovery. This treatment in taxation of unexplained amount suffered a disconnect viz-a-viz the facts of the case pertaining to the year to which the un-explained income/investment pertained. Such treatment, apart from resulting in technical lacunae, also has the potential to effect adversely the quality of assessment/revenue. Therefore, an amendment in subsection (2) of section 111 has been made through Finance Act, 2010 to add such unexplained amount/investment be taxed in the year to which it pertains. 2 Substituted for “(3) Where the declared value of any investment, valuable article or expenditure of a person is less than the cost of the investment or valuable article, or the amount of the expenditure, the Commissioner may, having regard to all the circumstances, include the difference in the person’s income chargeable to tax under the head “Income from 2[Other Sources”] in the tax year in which the difference is discovered.” By the Finance Act, 2003. 3 Substituted for “immediately preceding the financial year in which the difference is discovered” vide the Finance Act, 2010. 4 Substituted by the Finance Act, 2004. The substituted sub-section (4) read as follows: “(4) Sub-section (1) does not apply to any amount of foreign exchange remitted 1A [ ] from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.” 5 Semicolon and the word “and” substituted by the full stop & clause (b) omitted vide the Finance Act, 2010. 6 Substituted for figure “232” by the Finance Ordinance, 2002 7 Inserted by Finance Act, 2003 1 2010 – 2011 89 The Income Tax Ordinance, 2001 CHAPTER IX MINIMUM TAX *113. [1] 2[113. 1[, Minimum tax on the income of certain persons.- (1) This section shall apply to a resident company an individual (having turnover of fifty million rupees or above in the tax year 2009 or in any subsequent INCOME TAX Circular No. 10 dated the the July 16, 2010 APPLICABILITY OF MINIMUM TAX ON INCOME OF CERTAIN PERSONS. [Section 113] The following changes have been made in the minimum tax regime: (i) Rate of minimum tax has been enhanced from 0.5% to 1%, and minimum tax shall be applicable where a loss is suffered under the conditions as described under sub-section (1) of section 113, also in the case of – (a) an association of persons having turnover of fifty million rupees or above in the tax year 2007 or in any subsequent tax year shall also be liable to pay minimum tax on turnover @ 1% of their turnover; and (b) an individual having turnover of fifty million rupees or above in the tax year 2009 or in any subsequent tax year shall also be liable to 1% tax on the turnover. Provisions of section 113 shall be applicable accordingly. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008* WITHDRAWAL OF MINIMUM TAX PAYABLE ON DECLARED TURNOVER. [Section 113]. A resident company was not required to pay income tax due to loss or exemption from tax (under the Second Schedule) or as per other provisions of the Ordinance but where tax payable was less than 0.5% of the declared turnover, it had to pay minimum tax @ 0.5% of its declared turnover. Where tax so paid exceeded the actual tax payable for a year, the excess amount of tax paid was allowed to be carried forward for adjustment against tax liability upto succeeding five tax years. Loss incurring companies at times would pay minimum tax out of equity. This tax has, therefore, been abolished. 1 Section 113 omitted by the Finance Act, 2008, the omitted section read as follows: Minimum tax on the income of certain persons.- (1) This section shall apply to a resident company where, for any reason whatsoever, including the sustaining of a loss, the setting off of a loss of an earlier year, exemption from tax, the application of credits or rebates, or the claiming of allowances or deductions (including depreciation and amortisation deductions) allowed under this Ordinance or any other law for the time being in force, no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than one-half per cent of the amount representing the person’s turnover from all sources for that year. (2) Where this section applies – (a) the aggregate of the person’s turnover for the tax year shall be treated as the income of the person for the year chargeable to tax; 1[ ] (b) the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance), an amount equal to one-half per cent of the person’s turnover for the year1[; and] 1[(c) where tax paid under sub-section (1) exceeds the actual tax payable under Part I, Division II of the First Schedule, the excess amount of tax paid shall be carried forward for adjustment against tax liability under Part I, Division II of the First Schedule of the subsequent tax year: Provided that the amount under this clause shall be carried forward and adjusted against tax liability for five tax years immediately succeeding the tax year for which the amount was paid.] (3) In this section, “turnover” means – (a) the gross receipts, exclusive of 1[sales tax and 1[Federal] excise duty or] any trade discounts shown on invoices or bills, derived from the sale of goods; (b) the gross fees for the rendering of services 1[or giving benefits], including commissions; (a) the gross receipts from the execution of contracts; and the company’s share of the amounts stated above of any association of persons of which the company is a member. The word “and” omitted by the Finance Act, 2004. Substituted for a fullstop by the Finance Act, 2004. 1 Added by the Finance Act, 2004. 1 Inserted by the Finance Ordinance, 2002 1 Substituted for the word “Central” by the Finance Act, 2005 1 Inserted by the Finance Ordinance, 2002 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009RE-INTRODUCTION OF MINIMUM TAX ON TURNOVER DECLARED BY RESIDENT COMPANIES. [Section 113 & 137(1) & 147 & Clause 2A of Part-V of the Second Schedule] Finance Act 2008 abolished minimum tax payable by a resident company @ 0.5% of the turnover over for the year where no tax was payable or paid for the relevant tax year or tax payable or paid for the relevant tax year was less than 0.5% of the turnover from all sources for the said tax year. The same has been revived. However, according to the newly inserted section minimum tax will not be payable by a resident company declaring gross loss before set off of depreciation and other inadmissible expenses under the Ordinance and also such gross loss has not been arrived at by changing the accounting pattern. In such cases the Commissioner of Income Tax has been empowered to compute the tax as per historical accounting pattern and other provisions of the Ordinance shall apply. The turnover has been defined to mean a) The gross receipts from sale of goods excluding sales tax and Federal Excise Duty or trade discount shown on invoices/bills. Any amount taken as deemed income and assessed as final tax shall also be excluded. b) The gross fees for rendering of services or benefits including commission except those covered by Presumptive Tax Regime (PTR). c) The gross receipts from the execution of contracts other than those liable to final tax. d) The company’s share of the aforesaid amounts of any Association of Person of which the company is a member. 1 1 2010 – 2011 90 The Income Tax Ordinance, 2001 tax year) and an association of persons (having turnover of fifty million rupees or above in the tax year 2007 or in any subsequent tax year)] where, for any reason whatsoever allowed under this Ordinance, including any other law or for the time being in force ─ (a) loss for the year; (b) the setting off of a loss of an earlier year; (c) exemption from tax; (d) the application of credits or rebates; or (e) the claiming of allowances or deductions (including depreciation and amortization deductions) no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than 2[one] per cent of the amount representing the person’s turnover from all sources for that year: Provided that this sub-section shall not apply in the case of a company, which has declared gross loss before set off of depreciation and other inadmissible expenses under the Ordinance. If the loss is arrived at by setting off the aforesaid or changing accounting pattern, the Commissioner may ignore such claim and proceed to compute the tax as per historical accounting pattern and provision of this Ordinance and all other provisions of the Ordinance shall apply accordingly. (2 ) Where this section applies: (a) the aggregate of the person’s turnover as defined in sub-section (3) for the tax year shall be treated as the income of the person for the year chargeable to tax; (b) the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance), an amount equal to 3[one] per cent of the person’s turnover for the year; (c) where tax paid under sub-section (1) exceeds the actual tax payable under Part 1, Division II of the First Schedule, the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year: Provided that the amount under this clause shall be carried forward and adjusted against tax liability for three tax years immediately succeeding the tax year for which the amount was paid. (3) “turnover” means,- (a) the gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable; (b) the gross fees for the rendering of services for giving benefits including commissions; except covered by final discharge of tax liability for which tax is separately paid or payable; (c) the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and (d) the company’s share of the amounts stated above of any association of persons of which the company is a member.] Various exemptions which were earlier available to certain institutions from the application of section 113 have also been revived. However the exemption earlier available to a small company has not been made available. Section 113 inserted vide the Finance Act, 2009. 1 Words inserted vide the Finance Act, 2010. 2 Substituted for “one-half” vide the Finance Act, 2010. 3 Substituted for “one-half” vide the Finance Act, 2010. 2010 – 2011 91 The Income Tax Ordinance, 2001 1[113A. Tax on Income of certain persons.- (1) Subject to this Ordinance, where a retailer being an individual or an association of persons has turnover upto rupees five million for any tax year, such person may opt for payment of tax as a final tax at the rates specified in Division IA of Part I of the First Schedule. (2) For the purposes of this section,- (a) “retailer” means a person selling goods to general public for the purpose of consumption; (b) “turnover” shall have the same meaning as assigned to it in sub-section (3) of section 113. (3) The tax paid under this section shall be a final tax on the income arising from the turnover as specified in sub-section 2[(1)]. 3[The retailer shall not be entitled to claim any adjustment of withholding tax collected or deducted under any head during the year.]] 4[113B. Ó Taxation of income of certain retailers.— Subject to this Ordinance, a retailer being an individual or association of persons,— Added by the Finance Act, 2004. Brackets and figure “(2)” substituted by the Finance Act, 2007. 3 Words inserted by the Finance Act, 2007. 4 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAXATION OF INCOME OF CERTAIN RETAILERS [Section 113B) A retailer being an individual or AOP, where turnover is Rs.5 million or more and who is subject to special procedure for a payment of sales tax under the Sales Tax Act is liable to pay final tax at the rates specified under section 113B on his total turnover. Such retailer is however not entitled to claim any adjustment of withholding tax collected or deducted under any other heads. After amendment made through Finance Act 2009 the turnover chargeable to tax under this section will now exclude the sales of goods on which tax is deducted or deductible under section 153(1)(a). Section 113B substituted by the Finance Act, 2006. The old section read as follows: 4[113B. ÊTax on income of certain retailers.- Subject to this Ordinance, where a retailer of textile fabrics and articles of apparel including ready-made garments or fashion wear, articles of leather including foot-wear, carpets, surgical goods and sports goods, being an individual or an AOP, has turnover exceeding five million rupees for any tax year, such person shall pay final tax at the rate of 1% of turnover. This tax shall form part of the single stage sales tax at the rate 3% of the declared turnover.] 4 Added by the Finance Act, 2005. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. TAX ON INCOME OF CERTAIN RETAILERS. [Section 113B] A new section 113B has been inserted in the Ordinance, whereby a retailer of textile fabrics and articles of apparel including readymade garments or fashion wear, articles of leather including foot-wear, carpets, surgical goods and sports goods, having annual turnover exceeding five million rupees for a tax year shall pay final tax at the rate of 1% of the turnover as determined by the Sale Tax department. This tax shall form part of the single stage sales tax @ 3% of the turnover. This concession which is only for an individual or an AOP shall be available w.e.f. tax year 2006, and the taxpayer shall be required to file only a statement under section 115(4). Income Tax paid by companies under this scheme, will be treated as advance tax adjustable against their final tax liability. It may be clarified that this provision shall be applicable only in case of retail sales of commodities mentioned above. A retailer dealing in other commodities as well will have to file a separate return under normal law for that component of income. Ó EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAXATION OF INCOME OF CERTAIN RETAILERS [Section 113B) A retailer being an individual or AOP, where turnover is Rs.5 million or more and who is subject to special procedure for a payment of sales tax under the Sales Tax Act is liable to pay final tax at the rates specified under section 113B on his total turnover. Such retailer is however not entitled to claim any adjustment of withholding tax collected or deducted under any other heads. After amendment made through Finance Act 2009 the turnover chargeable to tax under this section will now exclude the sales of goods on which tax is deducted or deductible under section 153(1)(a). EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. TAXATION OF RETAILERS.[Section 113A & 113B] Retailers were assessed under two regimes given under section 113A and 113B. These regimes envisaged payment of income tax thereon, as under: Turnover Rate of Tax (i) up to Rs. 5 million @ 0.75% (ii) exceeding Rs. 5 million 2% (Sales Tax @ 1.25% and Income Tax @ 0.75%) under single stage sales tax regime. After amendments the retailers will now pay income tax as under:Turnover Rate of Tax (i) Upto Rs.5 million 0.5% (ii) Exceeding Rs.5 million but does not exceed Rs.10 million Rs.25,000 plus 0.5% of the amount of turnover exceeding Rs.5 million (iii) Exceeding Rs.10 million Rs.50,000 plus 0.75 % of the amount of turnover exceeding Rs.10 million (under single stage sales tax regime). - The retailers will not be entitled to claim any adjustment of withholding tax collected/deducted under any head during the year. The amendments made under sections 113A and 113B are applicable from tax year 2007 and onward. 1 2 2010 – 2011 92 The Income Tax Ordinance, 2001 (a) whose turnover exceeds five million rupees; and (b) who is subject to special procedure for payment of sales tax under chapter III of the Sales Tax Special Procedure Rules, 2006, Shall pay final tax at the 1[following rates] which shall form part of single stage sales tax [2] as envisaged in the aforesaid rules]3[: S. No. 1. 2. Amount of turnover Where turnover exceeds Rs.5,000,000 but does not exceed Rs. 10,000,000 Where turnover exceeds Rs. 10,000,000 Rate of tax Rs.25,000 plus 0.5% of the turnover exceeding Rs.5 ,000,000 Rs. 50,000 plus 0.75% of the turnover exceeding Rs.1 0,000,000. (c) The retailer shall not be entitled to claim any adjustment of withholding tax collected or deducted under any head during the year]4[: Provided that turnover chargeable to tax under this section shall not include the sale of goods on which tax is deducted or deductible under clause (a) of sub-section (1) of section 153.] Substituted for “rate of one percent of turnover for a tax year” by the Finance Act, 2007. Words “at the rate of three percent of the declared turnover” omitted by the Finance Act, 2007. 3 Colon, table and sub clause (c) inserted by the Finance Act, 2007. 4 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009MANDATORY FILING OF RETURNS BY CERTAIN PERSON [Section 114] In order to expand the tax base, following persons have been added to the already existing categories of taxpayer who are required to file the returns of income. a) Who owns immoveable property with land area of 500 Square yards or more located in a rating area. b) Who owns a flat having covered area of 2,000 square feet or more located in a rating area. c) Who owns a motor vehicle having engine capacity above 1000CC. d) Who has obtained a National Tax Number. Colon substituted and proviso inserted vide the Finance Act, 2009. 1 2 2010 – 2011 93 The Income Tax Ordinance, 2001 CHAPTER X PROCEDURE PART I RETURNS 114.Return of income.- (1) Subject to this Ordinance, the following persons are required to furnish a return of income for a tax year, namely:– 1[(a) every company; (ab) every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;] 2[(ac) any non-profit organization as defined in clause (36) of section 2; and (ad) any welfare institution approved under clause (58) of Part I of the Second Schedule;] 3[(b) Ê (i) any person not covered by clause 4[(a), (ab), (ac) or (ad)] who,- has been charged to tax in respect of any of the two preceding tax years; (ii) claims a loss carried forward under this Ordinance for a tax year; (iii) owns immovable property with a land area of two hundred and fifty square yards or more or owns any flat located in areas falling within the municipal limits existing immediately before the commencement of Local Government laws in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory]5[; (iv) owns immoveable property with a land area of five hundred square yards or more located in a rating area; (v) owns a flat having covered area of two thousand square feet or more located in a rating area; 1 Substituted for “(a) Every company and any other person whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year; and“ by Finance Act, 2003 2 Clauses (ac) & (ad) Added by the Finance Act, 2006. 3 Substituted by the Finance Act, 2005. The original clause (b) read as follows: (b) any person not covered by clause (a) A[or (ab)] who – (i) has been charged to tax in respect of any of the four preceding tax years; (ii) claims a loss carried forward under this Ordinance for a tax year; (iii) owns immovable property, with a land area of two hundred and fifty square yards or more, located in areas falling in the limits of a Metropolitan/Municipal Corporation, a Cantonment Board, or the Islamabad Capital Territory or owns any flat; (iv) owns a motor vehicle (other than a motor cycle) in Pakistan; (v) subscribes for a telephone including a mobile phone in Pakistan; (vi) has undertaken foreign travel in the tax year other than travel by a non-resident person or any travel for the purposes of the Haj, Umrah, or Ziarat; or (vii) is member of a club where the monthly subscription exceeds five hundred rupees or the admission fee exceeds twenty-five thousand rupees. A Inserted by Finance Act, 2003. * EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. MANDATORY ELECTRONIC FILING OF RETURNS AND STATEMENTS OF WITHHOLDING TAX. [Section 114(2A)] Section 114(2A) has been amended empowering the Board to make rules for the matters relating to electronic filing of returns and statements etc. Accordingly, corporate taxpayers will be required to file returns of income and withholding tax statements electronically from 1st July 2007 onwards. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. RELAXATION FOR MANDATORY FILING OF RETURN. [Section 114(1)(b)] The conditions for mandatory filing of return under section 114(1)(b) have been relaxed and subscribers of telephone, car owners, members of clubs and persons undertaking foreign travel have been absolved from the obligation of mandatory filing. Besides, the number of years of chargeability to tax has also been reduced from four to two years. 4 Substituted for the brackets, letters and word “(a) or (ab)” by the Finance Act, 2006. 5 Semi-colon substituted and new sub-clauses from (iv) to (vii) inserted vide the Finance Act, 2009. 2010 – 2011 94 The Income Tax Ordinance, 2001 (vi) owns a motor vehicle having engine capacity above 1000CC; and (vii) has obtained National Tax Number.] 1[(2) A return of income - (a) shall be in the prescribed form and shall be accompanied by such annexures, statements or documents as may be prescribed; (b) shall fully state all the relevant particulars or information as specified in the form of return, including a declaration of the records kept by the taxpayer; 2[and] (c) shall be signed by the person, being an individual, or the person's representative where section 172 applies.] 3[*(2A) A return of income filed electronically on the web or any magnetic media or any other computer readable media as may be specified by the Board shall also be deemed to be a return for the purpose of sub-section (1); and the Board may, by notification in the official Gazette, make rules for determining eligibility of the data of such returns and e-intermediaries who will digitise the data of such returns and transmit the same electronically to the Income Tax Department under their digital signatures 4[and other matters relating to electronic filing of returns, statements or documents, etc.]] (3) The Commissioner may, by notice in writing, require a person, or a person’s representative, as the case may be, to furnish a return of income by the date specified in the notice for a period of less than twelve months, where (a) the person has died; (b) the person has become bankrupt or gone into liquidation; (c) the person is about to leave Pakistan permanently; 5[ ] (e) the Commissioner otherwise considers it appropriate to require such a return to be furnished. (4) Subject to sub-section (5), the Commissioner may, by notice in writing, require any person who, in the Commissioner’s opinion, is required to file a return of income under this section for a tax year 6[or assessment year] but who has failed to do so to furnish a return of income for that year within thirty days from the date of service of such notice or such longer period as may be specified in such notice or as the Commissioner may allow. (5) A notice under sub-section (4) may be issued 7[in respect of one or more 8[of the]] last five completed tax years 9[or assessment years]. 1 Substituted for (2) A return of income – (a) shall be in the prescribed form; (b) shall state the information required by the form, including a declaration of the records kept by the taxpayer; (c) in the case of a person carrying on a business, shall include an income statement, balance sheet, and any other document as may be prescribed for the tax year; and (d) shall be signed by the person or the person’s representative. By Finance Act, 2003 2 Inserted by the Finance Act, 2005. 3 Inserted by the Finance Act, 2005. 4 Words inserted by the Finance Act, 2007. 5 Clause (d) omitted by Finance Act, 2003. The original clause (d) read as follows: “(d) the person is otherwise about to cease carrying on business in Pakistan; or “ 6 Inserted by Finance Act, 2003 7 Substituted for the words “only in respect of the” by Finance Act, 2003 8 Inserted by the Finance Act, 2005. 9 Inserted by the Finance Act, 2004. 2010 – 2011 The Income Tax Ordinance, 2001 95 1[(6) Subject to sub-section (6A), any person who, having furnished a return, discovers any omission or or wrong statement therein, may file revised return subject to the following conditions, namely:(a) it is accompanied by the revised accounts or revised audited accounts, as the case may be; and (b) the reasons for revision of return, in writing, duly signed, by the taxpayers are filed with the return] 2[(6A) If a taxpayer wishes to file a revised return voluntarily along with deposit of the amount of tax short paid or amount of tax sought to be evaded along with the default surcharge, whenever it comes to his notice, before receipt of notice under sections 177 or sub-section (9) of 122, no penalty shall be recovered from him: Provided that in case the taxpayer wishes to deposit the amount of tax as pointed out by the Commissioner during the audit or before the issuance of notice under sub-section (9) of section 122, he shall deposit the amount of tax sought to be evaded, the default surcharge and twenty-five per cent of the penalties leviable under the Ordinance along with the revised return: Provided further that in case the taxpayer wishes to revise the return after the issuance of a show cause notice under sub-section (9) of section 122, he shall deposit the amount of tax sought to be evaded, default surcharge and fifty per cent of the leviable penalties under the Ordinance along with the revised return and thereafter, the show cause notice shall stand abated.] (7) Every return purporting to be made or signed by, or on behalf of a person shall be treated as having been duly made by the person or with the person’s authority until the person proves the contrary. 115. ÓPersons not required to furnish a return of income.- 1[(1) Where the entire income of a taxpayer in a a tax year consists of income chargeable under the head “Salary”, Annual Statement of Deduction of Sub-section (6) substituted vide the Finance Act, 2010, the replaced sub-section with explanation and reference read as follows: [(6) Any person who, having furnished a return, discovers any omission or wrong statement therein, without prejudice to any other liability, which he may incur under this Ordinance, may furnish a revised return for that tax year at any time, within five years from the end of the financial year in which original return was filed, subject to the following, namely:(a) it is accompanied by the revised accounts or revised audited accounts, as the case may be; (b) the reason of revision of return, in writing, duly signed, is filed therewith,; and (c) it is filed before the issuance of the notice for amendment of assessment.] 1EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009CONDITIONAL REVISIONING OF RETURN. [Section 114(6)] Before the insertion of this amendment, a taxpayer was allowed to file revised return under the provision of sub-section (6) of section 114, at any time within five years of the filing of original return. This facility was being misused by some taxpayer who filed revised return at the time when amendment of assessment proceedings were in hand and demanded the closure of proceedings on the ground that the revised return is to be deemed amended assessment as provided under the law. To bring clarity and avoid unnecessary litigation, the said sub-section has been substituted and now the revised return is allowed to be filed within five years from the end of the financial year in which original return was filed without prejudice to any other liability which the taxpayer may incur under the Ordinance and subject to the following conditions: a) The revised return has to be accompanied by revised accounts or revised audited accounts as the case may be. b) The reason for revision of return, in writing, duly signed, has to be filed therewith. c) The revised return has to be filed before the issuance of the notice for amendment of assessment in respect of the relevant tax year. Example-I---As per old provisions Date(s) of filing of Return 31.12.2007 30.09.2008 Period of limitation of revision of return 31.12.2012 30.09.2013 Example-II---As per new provisions Date(s) of filing of Return 31.12.2007 30.09.2008 Financial year ending in which return was filed 30.06.2008 30.09.2009 1 1 Five years from the aforesaid date More time allowed as per amended provisions as compared with old provisions 30.06.2013 6 months 30.06.2014 9 months Sub section (6) substituted vide the Finance Act, 2009, the replaced text read as follows: (6) Any person who, having furnished a return, discovers any omission or wrong statement therein, may furnish a revised return within five years of the date that the original return was furnished. 2 Sub-section (6A) inserted vide the Finance Act, 2010. Ó EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009E-FILING OF RETURN AND WEALTH STATEMNT BY SALARIED PERSONS. [Section 115] The proviso to sub section (1) of section 115 has been substituted to provide that where salary income for the tax year is Rs. 500,000/or more, the taxpayer shall file return of income electronically in the prescribed form and it shall be accompanied by the proof of deduction or payment of tax as well as wealth statement as required u/s 116. 2010 – 2011 96 The Income Tax Ordinance, 2001 Income Tax From Salary, filed by the employer of such taxpayer, in prescribed form, the same shall, for the purposes of this Ordinance, be treated as a return of income furnished by the taxpayer under section 114: 2[Provided that where salary income, for the tax year is five hundred thousand rupees or more, the taxpayer shall file return of income electronically in the prescribed form and it shall be accompanied by the proof of deduction or payment of tax and wealth statement as required under section 116.] 3[(2)] (3) The following persons shall not be required to furnish a return of income for a tax year solely by reason of 4[sub-clause (iii)]of clause (b) of sub-section (1) of section 114 – (a) A widow; (b) an orphan below the age of twenty-five years; (c) a disabled person; or (d) in the case of ownership of immovable property, a non-resident person. (4) Any person who is not obliged to furnish a return for a tax year because all the person’s income is subject to final taxation under sections 1[ ]2[5, 6, 7,3[15,] 4[113A,] 5[113B,] 148, 6[clauses (a), (b) and (d) of subSTATEMENT OF FINAL TAXATION. [Section 115((4)] By virtue of amendment made in sub-section (4) of section 115, persons deriving income from rendering or providing of services are subject to minimum tax u/s 153 and would now be required to file a return of income instead of simplified statement of final taxation. 19. REVISION OF STATEMENT IN CASE OF FINAL TAXATION. [Section 115(4A)] A new sub section (4A) has been inserted in section 115 of the Ordinance to allow a person who, having furnished statement, discovers any omission or wrong statement therein, to furnish revised statement at any time within five years from the end of the financial year in which such statement was furnished. FILING OF WEALTH STATEMENT IN FINAL TAXATION REGIME (FTR) CASES. [Section 115(4B)] A new sub-section (4B) has been inserted in section 115 of the Ordinance whereby every person (other than company) filing statement under sub-section (4) of section 115 of the Ordinance, covered by Final Taxation Regime (FTR), who has paid tax amounting to Rs. 20,000/- or more for the tax year, is required to file wealth statement alongwith a wealth reconciliation statement. EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. FILING OF STATEMENT IN LIEU OF INCOME TAX RETURNS BY TAXPAYERS. [Section 115] Taxpayers who are covered by Presumptive Tax Regime are not obliged to file a return of income as required under section 114 of the Income Tax Ordinance, 2001. Such taxpayers are, however, required under section 115(4) to file prescribed statement showing particulars relating to the person’s income for the tax year. New sub-sections (5) and (6) to section 115 have been added through the Finance Act 2007 empowering the Commissioner to issue notice for filing the prescribed statement where statement has not been filed voluntarily by the taxpayer. The provision will be applicable from the tax year 2007. 1 Sub-section (1) substituted by the Finance Act, 2008, the old subsection read as follows: Where the entire income of a taxpayer in a tax year consists of income chargeable under the head "Salary", the taxpayer may, instead of furnishing a return as required under section 114 furnish – (a) Êa certificate from the person’s employer in the prescribed form stating such particulars, and accompanied by such statements, and verified in such manner, as may be prescribed, and such certificate shall be, for the purposes of this Ordinance, treated as a return of income furnished under section 1141[:] 1[Provided that a taxpayer shall not be required to furnish a certificate, if his employer has furnished for the same tax year, Annual Statement of Deduction of Income Tax From Salary as prescribed under the Income Tax Rules, 2002.] (b) 1[ ] a wealth statement referred to 1[in] section 116. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. EXEMPTION FROM FILING OF RETURNS BY PERSONS HAVING SALARY INCOME ONLY. [Section 115(1)(a)] Under section 115(1)(a), a taxpayer deriving only salary income is not obliged to furnish a return of income. Instead, he is required to file a prescribed certificate from the employer. Following the policy of simplification and facilitation for the taxpayers, Income Tax Rules have been reviewed and in this context, an Annual Statement of Deduction of Income Tax from Salary has been prescribed which shall be filed by the employer containing complete details of pay, allowances and tax deducted etc. In case of taxpayers deriving income from salary only, the prescribed annual statement filed by the employer will be considered as sufficient discharge of liability to file return of income on the part of individual employees. 1 The semicolon and word “; and” substituted by the Finance Act, 2005. 1 Inserted by the Finance Act, 2005. 1 The words, brackets, figure and comma “subject to sub-section (2),” omitted by the Finance Act, 2004. 1 Inserted by the Finance Ordinance, 2002 2 Proviso substituted vide the Finance Act, 2009, the replaced text read as follows: Provided that where salary income, for the tax year or the last tax year is five hundred thousand rupees or more, the taxpayer shall file wealth statement as required under section 116. 3 Omitted by the Finance Act, 2004. Omitted sub-section (2) read as follows: “(2) Clause (b) of sub-section (1) shall not apply to a person whose declared income for the tax year, or whose last declared or assessed income, is less than two hundred thousand rupees.” 4 Substituted for “sub-clauses (iii) through (vii)” by the Finance Act, 2008. 2010 – 2011 97 The Income Tax Ordinance, 2001 sub-section (1) of section 151, section 152,] 7[clauses (a) and (c) of subsection (1) of section] 153, 154, 156 8[, 156A, sub-section (3) of section 233, clause (a) and (b) of sub-section (1) of section 233A] or sub-section (5) of section 234] 9[or sub-section (3) of section 234A] shall furnish to the Commissioner a statement showing such particulars relating to the person’s income for the tax year in such form and verified in such manner as may be prescribed. 10[(4A) Any person who, having furnished a statement, discovers any omission or wrong statement therein, he may, without prejudice to any other liability which he may incur under this Ordinance, furnish a revised statement for that tax year, at any time within five years from the end of the financial year in which the original statement was furnished.] [(4B)]11 12[(5) Subject to sub-section (6), the Commissioner may, by notice in writing, require any person who, in his opinion, is required to file a prescribed statement under this section for a tax year but who has failed to do so, to furnish a prescribed statement for that year within thirty days from the date of service of such notice or such longer period as may be specified in such notice or as he may, allow. (6) A notice under sub-section (5) may be issued in respect of one or more of the last five completed tax years.] 116. *13Wealth statement.- (1) 14[The] Commissioner may, by notice in writing, require any person to furnish, on the date specified in the notice, a statement (hereinafter referred to as the "wealth statement") in the prescribed form and verified in the prescribed manner giving particulars of – (a) the person’s total assets and liabilities as on the date or dates specified in such notice; (b) the total assets and liabilities of the person’s spouse, minor children, and other dependents as on the date or dates specified in such notice; Word “148,” omitted by Finance Act, 2003 Substituted for the figures, letters, brackets and commas “151(a)(b), 153, 154, 156, 157 or 234(5)” by the Finance Ordinance, 2002. 3 Figure and comma inserted by the Finance Act, 2006. 4 Inserted by the Finance Act, 2004. 5 Inserted by the Finance Act, 2005. 6 The words, brackets, letters, commas and figures inserted by the Finance Act, 2006. 7 Words inserted vide the Finance Act, 2009. 8 Inserted by the Finance Act, 2004. 9 Words inserted vide the Finance Act, 2009. 10 Sub-section (4A) and (4B) inserted vide the Finance Act, 2009. 11 Sub-section (4B) omitted vide the Finance Act, the omitted sub-section read as follows: (4B) Every person (other than a company) filing statement under sub-section (4), falling under final tax regime (FTR) and has paid tax amounting to twenty thousand rupees or more for the tax year, shall file a wealth statement alongwith reconciliation of wealth statement. 12 Sub sections (5) and (6) inserted by the Finance Act, 2007. INCOME TAX Circular No. 10 dated the the July 16, 2010 WEALTH STATEMENT [Section 116]. A new sub-section (2A) has been introduced for the requirements of furnishing of Wealth statement, wealth reconciliation statement and explanation regarding sources of acquisition of assets appearing in the wealth statement, along with return of income filed in response to the provisional assessment. Secondly, the requirements of filing of wealth statement and wealth reconciliation along with statement in cases of final tax regime (under sub- section (4) of section 115), has been added to this section. This provision existed earlier under section 115. However, threshold of amount of tax under FTR has been enhanced from rupees twenty five thousand to rupees thirty five thousand for furnishing of wealth statement in such cases. EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009MANDATORY FILING OF WEALTH RECONCILIATION STATEMENT. [Section 116(1)] A new Clause (e) has been inserted in section 116 to provide that every individual taxpayer required to file wealth statement u/s 116 shall also furnish Wealth Reconciliation Statement. *13 EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. FILING OF WEALTH STATEMENT BY TAXPAYERS. [Section 116] Amendment has been made in section 116 through the Finance Act 2007 to authorize the commissioner to require any individual, to file wealth statement, irrespective of his quantum of income during the relevant tax year. Further, the mandatory requirement to file a wealth statement is extended to all those individuals whose declared income for the year exceeds Rs.500,000/-. This amendment will be applicable for the tax year 2007 and onward. 14 Substituted for “Subject to subsection (2), the” by the finance Act, 2007. 1 2 2010 – 2011 98 The Income Tax Ordinance, 2001 (c) any assets transferred by the person to any other person during the period or periods specified in such notice and the consideration for the transfer; [1] (d) the total expenditures incurred by the person, and the person’s spouse, minor children, and other dependents during the period or periods specified in the notice and the details of such expenditures 2[; and and (e) the reconciliation statement of wealth.] (2) Every resident taxpayer filing a return of income for any tax year3[whose last declared or assessed income 4[or the declared income for the year], is five hundred thousand rupees or more] shall furnish a wealth statement 5[and wealth reconciliation statement] for that year along with such return. 6[(2A) Where a person files a return in response to a provisional assessment under section 122C, he shall furnish a wealth statement for that year along with that return and such wealth statement shall be accompanied by a wealth reconciliation statement and an explanation of sources of acquisition of assets specified therein.] 7[(3) Where a person, who has furnished a wealth statement, discovers any omission or wrong statement statement therein, he may, without prejudice to any liability incurred by him under any provision of this Ordinance, furnish a revised wealth statement at any time before an assessment, for the tax year to which it relates, is made under sub-section (1) or sub-section (4) of section 122.] 8[(4) Every person (other than a company) filing statement under sub-section (4) of section 115, falling under final tax regime (FTR) and has paid tax amounting to thirty-five thousand rupees or more for the tax year, shall file a wealth statement alongwith reconciliation of wealth statement.] 117. Notice of discontinued business.- (1) Any person discontinuing a business shall give the Commissioner a notice in writing to that effect within fifteen days of the discontinuance. (2) The person discontinuing a business shall, under the provisions of this Ordinance or on being required by the Commissioner by notice, in writing, furnish a return of income for the period commencing on the first day of the tax year in which the discontinuance occurred and ending on the date of discontinuance and this period shall be treated as a separate tax year for the purposes of this Ordinance. (3) Where no notice has been given under sub-section (1) but the Commissioner has reasonable grounds to believe that a business has discontinued or is likely to discontinue, the Commissioner may serve a notice on the person who has discontinued the business or is likely to discontinue the business to furnish to the Commissioner within the time specified in the notice a return of income for the period specified in the notice. (4) A return furnished under this section shall be treated for all purposes of this Ordinance as a return of income, including the application of Section 120. 118. Method of furnishing returns and other documents.- (1) A return of income under section 114, an employer’s certificate under section 115, a statement required under sub-section (4) of section 115 or a wealth statement under section 116 shall be furnished in the prescribed manner. (2) A return of income 9[under section 114 or sub-section (4) of section 115] of a company shall be furnished – Word “and” omitted vide the Finance Act, 2009. Semi-colon and clause (e) inserted vide the Finance Act, 2009. 3 Inserted by the Finance Act, 2004. 4 Words inserted by the Finance Act, 2007. 5 Inserted vide the Finance Act, 2009. 6 Sub-section (2A) inserted vide the Finance Act, 2010. 7 Sub-section (3) added by Finance Act, 2003 8 Sub-section (4) inserted vide the Finance Act, 2010. 9 Inserted by Finance Act, 2003 1 2 2010 – 2011 99 The Income Tax Ordinance, 2001 (a) in the case of a company with a tax year ending any time between the first day of January and the thirtieth day of June, on or before the thirty-first day of December next following the end of the tax year to which the return relates; or (b) in any other case, on or before the thirtieth day of September next following the end of the tax year to which the return relates. 1[(3) A return of income for any person (other than a company), an Annual Statement of deduction of income tax from salary, filed by the employer of an individual or a statement required under sub-section (4) of section 115 shall be furnished as per the following schedule, namely:- (a) In the case of an Annual Statement of deduction of income tax from salary, filed by the employer of an individual, return of income through e-portal in the case of a salaried person or a statement required under sub-section (4) of section 115, on or before the 31st day of August next following the end of the tax year to which the return, Annual Statement of deduction of income tax from salary, filed by the employer or statement relates. (b) in the case of a return of income for any person (other than a company), as described under clause (a), on or before the 30th day of September next following the end of the tax year to which the return relates.] (4) A wealth statement shall be furnished by the due date specified in the notice requiring the person to furnish such statement or, where the person is required to furnish the wealth statement for a tax year under sub-section (2) of section 116, by the due date for furnishing the return of income for that year. (5) A return required to be furnished by a notice issued under section 117 shall be furnished by the due date specified in the notice. (6) Where a taxpayer is not borne on the National Tax Number Register and fails to file an application in the prescribed form and manner with the taxpayer’s return of income or employer’s certificate, such return or certificate shall not be treated as a return or certificate furnished under this section. 119. Extension of time for furnishing returns and other documents.- (1) A person required to furnish – (a) a return of income under section 114 or 117; (b) an employer’s certificate under section 115; (c) a statement required under sub-section (4) of section 115; or (d) a wealth statement under section 116, may apply, in writing, to the Commissioner for an extension of time to furnish the return, certificate, or statement, as the case may be. 1 Substituted vide the Finance Act, 2010, the replaced text read as follows: (3) A return of income for any person (other than a company), an employer certificate of an individual or a statement required under sub-section (4) of section 115 shall be furnished on or before the thirtieth day of September next following the end of the tax year to which the return, certificate or statement relates. INCOME TAX Circular No. 10 dated the the July 16, 2010 CHANGE IN DEADLINE FOR FILING OF ANNUAL STATEMENT BY THE EMPLOYER [Section 118(3)] Sub-section (3) of section 118 has been substituted to provide for change in deadline for furnishing of annual statement of deduction of income tax from salary to be filed by an employer of an individual, return of income trough e-portal in the case of a salaried person or a statement required under sub-section (4) of section 115 of the Income Tax Ordinance, 2001 from 30th day of September after the end of tax year to 31st day of August after the end of tax year. Last date for filing of income tax return in the case of individual and AOPs (30th September) remains unchanged. Also the deadline for filing of income tax return in the cases of the companies remains unchanged. 2010 – 2011 100 The Income Tax Ordinance, 2001 (2) An application under sub-section (1) shall be made by the due date for furnishing the return of income, employer’s certificate, or [1] statement to which the application relates. (3) Where an application has been made under sub-section (1) and the Commissioner is satisfied that the applicant is unable to furnish the return of income, employer’s certificate, or [2] statement to which the application relates by the due date because of – (a) absence from Pakistan; (b) sickness or other misadventure; or (c) any other reasonable cause, the Commissioner may, by 3[order], in writing, grant the applicant an extension of time for furnishing the return, certificate, or statement, as the case may be. (4) An extension of time under sub-section (3) should not exceed fifteen days from the due date for furnishing the return of income, employer’s certificate, or [4] statement, as the case may be, unless there are exceptional circumstances justifying a longer extension of time. 5[ ] (6) An extension of time granted under sub-section (3) shall not 6[, for the purpose of charge of surcharge] under sub-section (1) of section 205,] change the due date for payment of income tax under section 137. 7[default PART II ASSESSMENTS 8[120. Assessments.- (1) Where a taxpayer has furnished a complete return of income [other than a revised return under sub-section (6) of section 114] for a tax year ending on or after the 1st day of July, 2002,Ê the Commissioner shall be taken to have made an assessment of taxable income for that tax year, (a) and the tax due thereon, equal to those respective amounts specified in the return; and (b) the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished. The word “wealth” omitted by the Finance Ordinance, 2002 The word “wealth” omitted by the Finance Ordinance, 2002 3 Substituted for the word “notice” by the Finance Ordinance, 2002 4 The word “wealth” omitted by the Finance Ordinance, 2002 5 Omitted by the Finance Ordinance, 2002. The omitted sub-section reads as under: “(5) An applicant dissatisfied with a decision under sub-section (3) may challenge the decision only under the Part III of this Chapter.” 6 Inserted by the Finance Ordinance, 2002 7 Substituted for “additional tax” vide the Finance Act, 2010. 8 Section 120 substituted for “120. Assessments.- Where a taxpayer has furnished a return of income (other than a revised return under sub-section (6) of section 114) for a tax year 8[ending on or after the 1st day of July, 2002, –] (a) the Commissioner shall be taken to have made an assessment of the taxable income of the taxpayer for the year and the tax due thereon, equal to those respective amounts specified in the return; and (b) the taxpayer’s return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished.” By Finance Act, 2003 Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. SELECTION FOR AUDIT. [SECTION 120 (1A)] Law provides that where a taxpayer furnishes a complete return of income, it shall be taken for all purposes to be an assessment order issued by the Commissioner on the date the return was furnished. In order to remove any doubts about the competence of the Commissioner to select a case for audit, sub-section (1A) has been inserted in section 120 which empowers the Commissioner in this regard. This provision shall take effect from tax year 2005. 1 2 2010 – 2011 101 The Income Tax Ordinance, 2001 1[(1A) Notwithstanding the provisions of sub-section (1), the Commissioner may 2[conduct audit audit of the income tax affairs of a person] under section 177 and all the provisions of that section shall apply accordingly.] (2) A return of income shall be taken to be complete if it is in accordance with the provisions of sub-section (2) of section 114. (3) Where the return of income furnished is not complete, the Commissioner shall issue a notice to the taxpayer informing him of the deficiencies (other than incorrect amount of tax payable on taxable income, as specified in the return, or short payment of tax payable) and directing him to provide such information, particulars, statement or documents by such date specified in the notice. (4) Where a taxpayer fails to fully comply, by the due date, with the requirements of the notice under sub-section (3), the return furnished shall be treated as an invalid return as if it had not been furnished. (5) Where, in response to a notice under sub-section (3), the taxpayer has, by the due date, fully complied with the requirements of the notice, the return furnished shall be treated to be complete on the day it was furnished and the provisions of sub-section (1) shall apply accordingly. (6) No notice under sub-section (3) shall be issued after the end of the financial year in which return was furnished, and the provisions of sub-section (1) shall apply accordingly.] 3[120A. Investment Tax on income.— (1) Subject to this Ordinance, the Board may make a scheme of payment of investment tax in respect of undisclosed income, representing any amount or investment made in movable or immovable assets. (2) Where any person declares undisclosed income under subsection (1) in accordance with the scheme and the rules, the tax on such income called investment tax shall be charged at such rate as may be prescribed. (3) Where a person has paid tax on his undisclosed income in accordance with the scheme and the rules, he shall – (a) be entitled to incorporate in his books of account such undisclosed income in tangible form; and (b) not be liable to pay any tax, charge, levy, penalty or prosecution in respect of such income under this Ordinance. (4) For the purposes of this section – (i) “undisclosed income” means any income, including any investment to be deemed as income under section 111 or any other deemed income, for any year or years, which was chargeable to tax but was not so charged; and (ii) “investment tax” means tax chargeable on the undisclosed income under the scheme under subsection (1) and shall have the same meaning as given in clause (63) of section 2 of the Income Tax Ordinance, 2001.] Inserted by the Finance Act, 2005. Substituted for “select a person for an audit of his income tax affairs” vide the Finance Act, 2010. 3 Section 120A inserted by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008INTRODUCTION OF INVESTMENT TAX. [Section 120A]. In order to encourage and promote investment in business and industry, a time bound scheme of investment tax has been introduced allowing any past and present investment made in the business, industry, moveable or immovable assets to be declared in accordance with the scheme and tax paid @ 2% on the fair market value of investment as declared under the scheme. The declarant shall not be liable to any pecuniary or penal action, in respect of such income/assets, under the Ordinance. 11.1 New taxpayers availing the scheme would be required to file returns of income for the tax year 2008, at least for three subsequent tax years. However, they would neither be asked to file return of income for the last five years nor sources of acquisition of assets during the said period of five years as declared under the scheme would be questioned. This scheme would prove to be instrumental in substantially improving the tax base. The scheme has been released by the Board vide Circular No.03 of 2008 dated July 1, 2008. 1 2 2010 – 2011 1[121. (a) 102 The Income Tax Ordinance, 2001 Best judgement assessment.- (1) Where a person fails to[2] 3[(aa) furnish a statement as required by a notice under sub-section (5) of section 115; or] (b) furnish a return as required under section 143 or section 144; or (c) furnish the statement as required under section 116; or (d) produce before the Commissioner, or any person employed by a firm of chartered accountants 4[or a firm of cost and management accountants] under section 177, accounts, documents and records required to be maintained under section 174, or any other relevant documents or evidence that may be required by him for the purpose of making assessment of income and determination of tax due thereon, the Commissioner may, based on any available information or material and to the best of his judgement, make an assessment of the taxable income 5[or income] of the person and the tax due thereon. (2) As soon as possible after making an assessment under this section, the Commissioner shall issue the assessment order to the taxpayer stating(a) the taxable income; (b) the amount of tax due; (c) the amount of tax paid, if any; and (d) the time, place and manner of appealing the assessment order. (3) An assessment order under this section shall only be issued within five years after the end of the tax year or the income year to which it relates.] Â 122. Amendment of assessments.- (1) Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121,1 [or issued under section EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009BEST JUDGMENT ASSESSMENT IN FTR CASES. [Section 121(1)(aa)] The powers of the Commissioner of Income Tax to make best judgment assessment u/s 121 of the Ordinance on the basis of available information and material have been extended to such cases where a person fails to furnish statement of final taxation under subsection (5) of section 115 of the Ordinance. Substituted for “121. Assessment of persons who have not furnished a return.- (1) Where a person required 1[by the Commissioner through a notice] to furnish a return of income for a tax year fails to do so by the due date, the Commissioner may, based on any available information and to the best of the Commissioner’s judgement, make an assessment of the taxable income of the person and the tax due thereon for the year. (2) As soon as possible after making an assessment under this section, the Commissioner shall issue, in writing, an assessment order to the taxpayer stating – (a) the taxable income of the taxpayer for the year; (b) the amount of tax due; (c) the amount of tax paid, if any; and (d) the time, place, and manner of appealing the assessment order. (3) An assessment order shall only be issued within five years after the end of the tax year, 1[or the income year,] to which it relates 1[ ].” By Finance Act, 2003 2 Clause (a) omitted vide the Finance Act, 2010, the omitted text read as follows: furnish a return of income as required by a notice under sub-section (3) or sub-section (4) of section 114; or 3 Clause (aa) inserted vide the Finance Act, 2009. 4 Words inserted vide the Finance Act, 2010. 5 Words inserted vide the Finance Act, 2010. Â INCOME TAX Circular No. 10 dated the the July 16, 2010 AMENDMENT OF ASSESSMENTS [Section 122]. The following amendments have been made in section 122 of the Income Tax Ordinance, 2001:(i) Sub-section (4) of section 122 of the Income Tax Ordinance, 2001 has been amended. This sub-section provides for further amendment of assessments amended already under sub-section (1) and subsection (3) of section 122 of the Income Tax Ordinance, 2001. In certain situations assessments amended under sub-section (5A) are also allowed to be further amended now under subsection (4) of section 122. These amendments are aimed at streamlining the functions of assessment for safeguarding revenues. 1 2010 – 2011 103 The Income Tax Ordinance, 2001 59, 59A, 62, 63 or 65 of the repealed Ordinance,] by making such alterations or additions as the Commissioner considers necessary2[ ]. 3[(2) No order under sub-section (1) shall be amended by the Commissioner after the expiry of five years from the end of the financial year in which the Commissioner has issued or treated to have issued the assessment order to the taxpayer.] (3) Where a taxpayer furnishes a revised return under sub-section (6) 4 [or (6A)] of section 114 - (a) the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and (b) the taxpayer’s revised return shall be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished. (4) Where an assessment order (hereinafter referred to as the “original assessment”) has been amended under sub-section (1) 5[,] (3) 6[or (5A)], the Commissioner may further amend, 7[as many times as may be necessary,] the original assessment within the later of – (a) five years 8[from the end of the financial year in which] the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or (b) one year 9[from the end of the financial year in which] the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer. 10[(4A) In respect of an assessment made under the repealed Ordinance, nothing contained in sub-section (2) or, as the case may be, sub-section (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time-limit specified in that section shall apply accordingly.] 11[(5) An assessment order in respect of a tax year, or an assessment year, shall only be amended under sub-section (1) and an amended assessment for that year shall only be further amended under sub- (ii) Through insertion of sub-section (5AA) the Commissioner has been empowered to amend an assessment order under subsection (5A) and such coverage operates retrospectively, from 1st day of July, 2003. EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009LIMITATION FOR AMENDMENT OF ASSESSMENT [section 122(2) and (4)] Sub-sections (2) and (4) of section 122 of the Ordinance have been amended to provide a uniform timeline of five years reckoned from the end of the financial year in which the Commissioner has issued or treated to have issued the assessment order to the taxpayer for amendment of assessment. Previously such limitation for finalization of assessment was to be worked out with reference to the date of filing of return which had created difficulties in ascertaining the limitation period in different cases where returns were filed on different dates during the tax year. Income Tax Cir. No. 1 dated the 1st July, 2006 REVISION BY THE REGIONAL COMMISSIONER OF INCOME TAX AGAINST ORDER OF THE COMMISSIONER UNDER WHT REGIME. [Section 122B] Under various provisions of law relevant to withholding tax, the Commissioner is empowered to issue exemption or lower rate deduction certificate to the taxpayers. However, no appeal can be filed if such certificate is refused. To take care of such like eventualities Regional Commissioner of Income Tax has been empowered to review the orders of the CIT. 1 Inserted by the Finance Ordinance, 2002 2 Words “to ensure that the taxpayer is liable for the correct amount of tax for the tax year to which the assessment order relates” omitted by Finance Act, 2003. 3 Sub-section (2) substituted vide the Finance Act, 2009, the replaced text read as follows: (2) An assessment order shall only be amended under subsection (1) within five years after the Commissioner has issued or is treated as having issued the assessment order on the taxpayer. 4 Inserted vide the Finance Act, 2010. 5 Substituted for “or” vide the Finance Act, 2010 6 Inserted vide the Finance Act, 2010 and EFFECTED FROM THE FIRST DAY OF JULY, 2003 7 Inserted by the Finance Ordinance, 2002 8 Substituted for “after” vide the Finance Act, 2009. 9 Substituted for “after” vide the Finance Act, 2009. 10 Sub-section (4A) inserted by Finance Act, 2003 11 Substituted for “(5) An assessment order shall only be amended under sub-section (1) and an amended assessment shall only be amended under subsection (4) where the Commissioner – 2010 – 2011 104 The Income Tax Ordinance, 2001 section (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that – (i) any income chargeable to tax has escaped assessment; or (ii) total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or (iii) any amount under a head of income has been mis-classified.] 1[(5A) Subject to sub-section (9), the Commissioner may amend , or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue. 2[(5AA) In respect of any subject matter which was not in dispute in an appeal the commissioner shall have and shall be deemed always to have had the powers to amend or further amend an assessment order under sub-section (5A).] (5B) Any amended assessment order under sub-section (5A) may be passed within the timelimit specified in sub-section (2) or sub-section (4), as the case may be.] (6) As soon as possible after making an amended assessment under 3[sub-sections (1), sub-section (4) or sub-section (5A)], the Commissioner shall issue an amended assessment order to the taxpayer stating – (a) the amended taxable income of the taxpayer; (b) the amended amount of tax due; (c) the amount of tax paid, if any; and (d) the time, place, and manner of appealing the amended assessment. (7) An amended assessment order shall be treated in all respects as an assessment order for the purposes of this Ordinance, other than for the purposes of sub-section (1). (8) For the purposes of this section, “definite information” includes information on sales or purchases of any goods made by the taxpayer, 4[receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance,] and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer. 5[(9) No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard.] 6[122A. Revision by the Commissioner.- (1) The Commissioner may 7[, suo moto,] call for the record of any proceeding under this Orinanance or under the repealed Ordinance in which an order has been passed by any 8[Officer of Inland Revenue] other than the Commissioner (Appeals). (a) is of the view that this Ordinance 11[or the repealed Ordinance] has been incorrectly applied in making the assessment (including the misclassification of an amount under a head of income 11[, incorrect payment of tax with the return of income, an incorrect claim for tax relief or rebate,] an incorrect claim for exemption of any amount or an incorrect claim for a refund); or (b) has definite information acquired from an audit or otherwise that the 11[income has been concealed or inaccurate particulars of income have been furnished or the assessment is otherwise incorrect].” By Finance Act, 2003 1 Sub-Sections (5A) & (5B) inserted by Finance Act, 2003 2 Sub-section (5AA) inserted vide the Finance Act, 2010. 3 Substituted for “sub-section (1) or (4)” by Finance Act, 2003 4 Inserted by the finance Ordinance, 2002 5 Added by the Finance Ordinance, 2002 6 Section 22A inserted by Finance Act, 2003 7 The word “suo moto” substituted by the Finance Act, 2005. It was inserted by the Finance Act, 2004.. 8 Substituted for “taxation officer” vide the Finance Act, 2010. 2010 – 2011 105 The Income Tax Ordinance, 2001 (2) Subject to sub-section (3), where, after making such inquiry as is necessary, Commissioner considers that the order requires revision, the Commissioner may make such revision to the order as the Commissioner deems fit. (3) An order under sub-section (2) shall not be prejudicial to the person to whom the order relates. (4) The Commissioner shall not revise any order under sub-section (2) if(a) an appeal against the order lies to the Commissioner (Appeals) or to the Appellate Tribunal , the time within which such appeal may be made has not expired; or (b) the order is pending in appeal before the Commissioner (Appeals) or has been made the subject of an appeal to the Appellate Tribunal.] 1[122B . Revision by the Regional Commissioner.- (1) The Regional Commissioner may, either of his own motion or on an application made by the taxpayer for revision, call for the record of any proceedings relating to issuance of an exemption or lower rate certificate with regard to collection or deduction of tax at source under this Ordinance, in which an order has been passed by any authority subordinate to him. (2) Where, after making such inquiry as is necessary, Regional Commissioner considers that the order requires revision, the Regional Commissioner may, after providing reasonable opportunity of being heard to the taxpayer, make such order as he may deem fit in the circumstances of the case.] 2[122C. Provisional assessment.(1) Where in response to a notice under sub-section (3) or subsection (4) of section 114 a person fails to furnish return of income for any tax year, the Commissioner may, based on any available information or material and to the best of his judgment, make a provisional assessment of the taxable income or income of the person and issue a provisional assessment order specifying the taxable income or income assessed and the tax due thereon. (2) Notwithstanding anything contained in this Ordinance, the provisional assessment order completed under sub-section (1) shall be treated as the final assessment order after the expiry of sixty days from the date of service of order of provisional assessment and the provisions of this Ordinance shall apply accordingly: Provided that the provisions of sub-section (2) shall not apply if return of income alongwith wealth statement, wealth reconciliation statement and other documents required under sub-section (2A) of section 116 are filed by the person for the relevant tax year during the said period of sixty days.] 123. Provisional assessment in certain cases.- (1) Where a concealed asset of any person is impounded by any department or agency of the Federal Government or a Provincial Government, the Commissioner may, at any time before issuing any assessment order under section 121 or any amended assessment order under section 122, issue to the person a provisional assessment order or provisional amended assessment order, as the case may be, for the last completed tax year of the person taking into account the concealed asset. (2) The Commissioner shall finalise a provisional assessment order or a provisional amended assessment order as soon as practicable 3[ ]. (3) In this section, “concealed asset” means any property or asset which, in the opinion of the Commissioner, was acquired from any income subject to tax under this Ordinance. 4Assessment giving effect to an order.- (1) Except where sub-section (2) applies, where, in 124. consequence of, or to give effect to, any finding or direction in any order made under Part III of this Section 122B added by the Finance Act, 2006. Section 122C inserted vide the Finance Act, 2010. 3 Words “after making it” omitted by Finance Act, 2003 4 EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. LIMITATION IN SET ASIDE CASES. [Section 124] Section 124 implied that even in cases where the Department or the taxpayer had gone into second appeal or reference against the order setting aside the original assessment (full or partly), the Commissioner would have to complete the reassessment within the 1 2 2010 – 2011 106 The Income Tax Ordinance, 2001 Chapter by the Commissioner (Appeals), Appellate Tribunal, High Court, or Supreme Court an assessment order or amended assessment order is to be issued to any person, the Commissioner shall issue the order within two years from the end of the financial year in which the order of the Commissioner (Appeals), Appellate Tribunal, High Court or Supreme Court, as the case may be, was served on the Commissioner. ∇ (2) Where, by an order made under Part III of this Chapter by the Commissioner 1[or [2], as the case may be,] (Appeals), Appellate Tribunal, High Court, or Supreme Court, an assessment order is set aside 3[wholly or partly,] and the Commissioner 4[or Commissioner (Appeals), as the case may be,] is directed to 5[pass] a new assessment order, the Commissioner 6[or Commissioner (Appeals), as the case may be,] shall 7[pass] the new order within 8[one year from the end of the financial year in which] the Commissioner is served with the order. 9[Provided that limitation under this sub-section shall not apply, if an appeal or reference has been preferred, against the order [10] passed by a [11] Appellate Tribunal or a High Court.] (3) Where an assessment order has been set aside or modified, the proceedings may commence from the stage next preceding the stage at which such setting aside or modification took place and nothing contained in this Ordinance shall render necessary the re-issue of any notice which had already been issued or the re-furnishing or re-filing of any return, statement, or other particulars which had already been furnished or filed. (4) Where direct relief is provided in an order under section 129 or 132, the Commissioner shall issue appeal effect orders within two months of the date the Commissioner is served with the order. (5) Where, by any order referred to in sub-section (1), any income is excluded – (a) from the computation of the taxable income of a taxpayer for any year and held to be included in the computation of the taxable income of the taxpayer for another year; or (b) from the computation of the taxable income of one taxpayer and held to be included in the computation of the taxable income of another taxpayer, the assessment or amended assessment relating to that other tax year or other taxpayer, as the case may be, shall be treated as an assessment or amended assessment to be made in consequence of, or to give effect to, a finding or direction contained in such order. limitation period of one year. This created unnecessary workload and hardship for taxpayers and at times led to multiplicity of appeals. A proviso after section 124(2) has been added which envisages that limitation provided under this sub-section shall not apply, if an appeal or reference has been preferred against the order by any authority, tribunal or court of setting aside the assessment. ∇ INCOME TAX Circular No. 10 dated the the July 16, 2010 ASSESSMENT GIVING EFFECT TO AN ORDER [Section 124(2)]. Since the Commissioner appeal is no more empowered to set-aside an assessment, therefore necessary amendment in subsection (2) of section 124 of the Income Tax Ordinance, 2001 has been made to delete the reference pertaining to “setaside orders” EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008PROVIDING LIMITATION ON COMMISSIONER (APPEALS) TO MAKE ORDER IN CASES SET-ASIDE BY ITAT. [Section 124(2)]. No limitation for making a fresh order by Commissioner (Appeals) was provided in sub-section (2) of section 124 where an order has been set-aside by the Income Tax Appellate Tribunal for re-adjudication by CIT (A). Such cases were generally not decided by the Commissioner (Appeals) promptly, causing unnecessary hardship to the appellant taxpayers. 12.2 Limitation period as provided in sub-section (2) of section 124 of the Ordinance for making order consequent to directions of the Tribunal, would now be applicable to CIT (A) as well for making order remitted back to him by ITAT. This amendment would mitigate the grievance of the taxpayers. 1 Words inserted by the Finance Act, 2008 2 Words “Commissioner (Appeals)” omitted vide the Finance Act, 2010. 3 Inserted by Finance Act, 2003 4 Words inserted by the Finance Act, 2008 5 Substituted for “make” vide the Finance Act, 2010. 6 Words inserted by the Finance Act, 2008 7 Substituted for “make” vide the Finance Act, 2010. 8 Substituted for the words “six months from the date” by the Finance Ordinance, 2002. 9 Inserted by the Finance Act, 2005. 10 Words “setting aside the assessment,” omitted vide the Finance Act, 2010. 11 Words “Commissioner (Appeals),” omitted vide the Finance Act, 2010. 2010 – 2011 107 The Income Tax Ordinance, 2001 (6) Nothing in this Part shall prevent the issuing of an assessment order or an amended assessment order to give effect to an order made under Part III of this Chapter by the Commissioner (Appeals), Appellate Tribunal, High Court, or Supreme Court. 1[(7) The provisions of this section shall in like manner apply to any order issued by any High Court or the or the Supreme Court in exercise of original or appellate jurisdiction.] 2[124A. Powers of tax authorities to modify orders, etc. (1) Where a question of law has been decided by a High Court or the Appellate Tribunal in the case of a taxpayer, on or after first day of July 2002, the Commissioner may, notwithstanding that he has preferred an appeal against the decision of the High Court or made an application for reference against the order of the Appellate Tribunal, as the case may be, follow the said decision in the case of the said taxpayer in so far as it applies to said question of law arising in any assessment pending before the Commissioner until the decision of the High Court or of the Appellate Tribunal is reversed or modified. (2) In case the decision of High Court or the Appellate Tribunal, referred to in sub-section (1), is reversed or modified, the Commissioner may, notwithstanding the expiry of period of limitation prescribed for making any assessment or order, within a period of one year from the date of receipt of decision, modify the assessment or order in which the said decision was applied so that it conforms to the final decision.] 125. Assessment in relation to disputed property.- Where the ownership of any property the income from which is chargeable to tax under this Ordinance is in dispute in any Civil Court in Pakistan, an assessment order or amended assessment order in respect of such income may be issued at any time within one year after the end of the financial year in which the decision of the Court is made. 126. Evidence of assessment.- (1) The production of an assessment order or a certified copy of an assessment order shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part III of this Chapter relating to the assessment, that the amount and all particulars of the assessment are correct. (2) Any 3[order] of assessment or other document purporting to be made, issued, or executed under under this Ordinance may not be – (a) quashed or deemed to be void or voidable for want of form; or (b) affected by reason of any mistake, defect, or omission therein, if it is, in substance and effect, in conformity with this Ordinance and the person assessed, or intended to be assessed or affected by the document, is designated in it according to common understanding. Inserted by Finance Act, 2003 Inserted by the Finance Ordinance, 2002. 3 Substituted for “notice” by Finance Act, 2003 1 2 2010 – 2011 108 The Income Tax Ordinance, 2001 PART III APPEALS 127. Appeal to the Commissioner (Appeals).- 1[(1) Any person dissatisfied with any order passed by a Commissioner or a taxation officer under section 121, 122, 143, 144, 2[162,] 170, 182, [3]4[or 205], or an order under sub-section (1) of section 161 holding a person to be personally liable to pay an amount of tax, or an order under clause (f) of sub-section (3) of section 172 5[declaring] a person to be the representative of a non-resident person 6[or an order giving effect to any finding or directions in any order made under this Part by the Commissioner (Appeals), Appellate Tribunal, High Court or Supreme Court] , or an order under section 221 refusing to rectify the mistake, either in full or in part, as claimed by the taxpayer or an order having the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the person, may prefer an appeal to the Commissioner (Appeals) against the order.] 7[(2) No appeal under sub-section (1) shall be made by a taxpayer against an order of assessment unless the taxpayer has paid,(a) the amount of tax due under sub-section (1) of section 137, and 8[(b) No appeal under sub-section (1), shall be made by a taxpayer *[again] an order of assessment unless the taxpayer has paid the amount of tax due under sub-section (1) of section 137.] (3) An appeal under sub-section (1) shall– (a) be in the prescribed form; (b) be verified in the prescribed manner; (c) state precisely the grounds upon which the appeal is made; (d) be accompanied by the prescribed fee specified in sub-section (4); and (e) be lodged with the Commissioner (Appeals) within the time set out in sub-section (5). (4) The prescribed fee 9[shall be] – 1 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009FILING OF APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). [Section 127(1) and (4)] Sub section (1) of section 127 has been amended providing that if an order giving effect to any findings or directions to any order is made under Part III of Chapter X by the Taxation Officer and the taxpayer is not satisfied with the order passed, the tax payer may again contest such order before the CIT (Appeals). It was a lacuna in law which has been removed. This amendment will help the taxpayer to contest the legal issues before the appellate fora, even if no tax liability is involved in the order passed by the Taxation Officer. Further, previously a taxpayer was not allowed to file appeal against charge of additional tax u/s 205 of the Ordinance. Now after amendment in sub-section (1) of section 127 the taxpayer can file appeal against such order u/s 205. Sub-section (4) has also been amended to fix appeal fee at Rs. 1,000/- instead of determining the fee in relation to the tax assessed. Substituted by the Finance Ordinance, 2002. The original sub-section (1) read as follows: “(1) Any person dissatisfied with any proceeding under this Ordinance in which an order has been issued by a Commissioner of Income Tax (other than the Commissioner (Appeals)) or a taxation officer may prefer an appeal to the Commissioner (Appeals) against the order.” 2 Inserted by the Finance Act, 2004 3 Figures & commas “183, 184, 185, 186, 187, 188, 189” omitted vide the Finance Act, 2010. 4 Substituted for “or 189” vide the Finance Act, 2009. 5Substituted for “treating” by Finance Act, 2003 6 Words inserted vide the Finance Act, 2009. 7 Substituted by the Finance Ordinance, 2002. The original sub-section (2) read as follows: “(2) No appeal may be made by a taxpayer against an assessment unless the amount of tax due under the assessment that is not in dispute and fifteen per cent of the disputed tax has been paid by the taxpayer.” 8 Clause (b) substituted by the Finance Act, 2004, the old clause read as follows: “(b) an amount equal to(i) fifteen percent of the amount of tax assessed as is in excess of the tax due under sub-section (1) of section 137, or (ii) twenty percent of the amount of tax assessed for the immediately preceding tax year, and where a person has not been assessed to tax for that tax year, thirty percent of the amount of tax mentioned in clause (a), whichever is less.” * This word may read as “against” 9 Substituted for the word “is” by the Finance Ordinance, 2002 2010 – 2011 109 The Income Tax Ordinance, 2001 (a) in the case of an appeal against an assessment, 1[one thousand rupees] 2; or (b) in any other case – (i) where the appellant is a company, one thousand rupees; or (ii) where the appellant is not a company, two hundred rupees. 3[(5) An appeal shall be preferred to the Commissioner (Appeals) within thirty days of the following— (a) where the appeal relates to any assessment or penalty, the date of service of the notice of demand relating to the said assessment or penalty, as the case may be; and (b) in any other case, the date on which the order to be appealed against is served.] (6) The Commissioner (Appeals) may, upon application in writing by the appellant, admit an appeal after the expiration of the period specified in sub-section (5) if the Commissioner (Appeals) is satisfied that the appellant was prevented by sufficient cause from lodging the appeal within that period. 128. Procedure in appeal.- (1) The Commissioner (Appeals) shall give notice of the day fixed for the hearing of the appeal to the appellant and to the Commissioner against whose order the appeal has been made. (2) The Commissioner (Appeals) may adjourn the hearing of the appeal from time to time. (3) The Commissioner (Appeals) may, before the hearing of an appeal, allow an appellant to file any new ground of appeal not specified in the grounds of appeal already filed by the appellant where the Commissioner (Appeals) is satisfied that the omission of the ground from the form of the appeal was not wilful or unreasonable. (4) The Commissioner (Appeals) may, before disposing of an appeal, call for such particulars as the Commissioner (Appeals) may require respecting the matters arising in the appeal or cause further enquiry to be made by the Commissioner. (5) The Commissioner (Appeals) shall not admit any documentary material or evidence which was not produced before the Commissioner unless the Commissioner (Appeals) is satisfied that the appellant was prevented by sufficient cause from producing such material or evidence before the Commissioner. 129. Decision in appeal.- (1) In disposing of an appeal lodged under section 127, the Commissioner (Appeals) may – 4[(a) Ê make an order to confirm, modify or annul the assessment order after examining such evidence as required by him respecting the matters arising in appeal or causing such further enquires to be made as he deems fit; or] Substituted for “the lesser of one thousand rupees or ten per cent of the tax assessed” vide the Finance Act, 2009. Words “or ten per cent of the tax assessed” already omitted but the Finance Act, 2010 again want to delete it. 3 Substituted by the Finance Ordinance, 2002. The original sub-section (5) read as follows: “ “(5) An appeal shall be lodged with the Commissioner (Appeals) – (a) where the appeal relates to an assessment order, within thirty days of the date of service of the demand relating to the assessment; or (b) in any other case, within thirty days of the date of service of the notice of the decision or determination appealed against.” 4 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009FIXING OF MAXIMUM TIME LIMIT TO PASS AN ORDER BY THE COMMISSIONER (APPEALS). [Section 129(4)] 1 2 2010 – 2011 (b) 110 The Income Tax Ordinance, 2001 in any other case, make such order as the Commissioner (Appeals) thinks fit. (2) The Commissioner (Appeals) shall not increase the amount of any assessment order or decrease the amount of any refund unless the appellant has been given a reasonable opportunity of showing cause against such increase or decrease, as the case may be. (3) Where, as the result of an appeal, any change is made in the assessment of an association of persons or a new assessment of an association of persons is ordered to be made, the Commissioner (Appeals) may authorise the Commissioner to amend accordingly any assessment order made on a member of the association and the time limit in sub-section (2) of section 122 shall not apply to the making such amended assessment. (4) As soon as practicable after deciding an appeal, the Commissioner (Appeals) shall serve [ 1] his order on the appellant and the Commissioner 2[: Provided that such order shall be passed not later than one hundred and twenty days from the date of filing of appeal or within an extended period of sixty days, for reasons to be recorded in writing by the Commissioner (Appeals): Provided further that any period during which the hearing of an appeal is adjourned at the request of the appellant or is postponed due to any appeal or proceedings or stay order, remand or alternative dispute resolution proceedings or for any other reason, shall be excluded in the computation of the aforementioned periods.] (5) Where the Commissioner (Appeals) has not made an order on an appeal before the expiration of months from the end of the month in which the appeal was lodged, the relief sought by the appellant in the appeal shall be treated as having been given and all the provisions of this Ordinance shall have effect accordingly. 3[four] (6) For the purposes of sub-section (5), any period during which the hearing of an appeal is adjourned on the request of the appellant shall be excluded in the computation of the period of 4[four] months referred to in that sub-section. (7) The provisions of sub-section (5) shall not apply unless a notice by the appellant stating that no order under sub-section (1) has been made is personally served by the appellant on the Commissioner (Appeals) not less than thirty days before the expiration of the period of 5[four] months. 130. Appointment of the Appellate Tribunal. – (1) There shall be established an Appellate Tribunal to exercise the functions conferred on the Tribunal by this Ordinance. A new proviso has been added to sub-section (4) of section 129 of the Ordinance by virtue of which the Commissioner (Appeals) is now required to pass an order not later than 120 days from the date of filing of appeal or within an extended period of 60 days for reasons to be recorded in writing by him. The period during which the hearing of an appeal is adjourned at the request of the appellant or is postponed due to any appeal or proceedings or stay order, remand or alternative dispute resolution proceedings or for any other reason, shall be excluded in the computation of the aforementioned period. Substituted by the Finance Act, 2005. The original clause (a) read as follows: (a) in the case of an appeal against an assessment order – (i) make an order to set aside the assessment order and direct the Commissioner to make a new assessment order in accordance with any directions or recommendations of the Commissioner (Appeals); or (ii) make an order to confirm, modify or annul the assessment order; or Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. SETTING ASIDE OF ASSESSMENT ORDER BY COMMISSIONER (APPEALS). [Section 129 (1)(a)] Clause (a) of sub-section (1) of section 129 has been substituted and Commissioner (Appeals) has been divested of the option to setaside an assessment. After amendment Commissioner (Appeals) would be able only to modify, confirm or annul the assessment after making (or getting conducted) enquiries or examining the books of accounts etc. as he deems fit. This will bring relief to the taxpayers and also stop unnecessary deferment of revenue. The provision of said clause will be applicable in case of appeals filed on July 1, 2005 and onwards. 1 The words “notice of” omitted by the Finance Ordinance, 2002 2 Provisos inserted vide the Finance Act, 2009. 3 Substituted for “three” by the Finance Act, 2008. 4 Substituted for “three” by the Finance Act, 2008. 5 Substituted for “three” by the Finance Act, 2008. 2010 – 2011 111 The Income Tax Ordinance, 2001 (2) The Appellate Tribunal shall consist of a chairperson and such other judicial and accountant members as are appointed by the Federal Government having regard to the needs of the Tribunal. (3) A person may be appointed as a judicial member of the Appellate Tribunal if the person – (a) has exercised the powers of a District Judge and is qualified to be a Judge of a High Court; or (b) is or has been an advocate of a High Court and is qualified to be a Judge of the High Court. 1[(4) A person may be appointed as an accountant member of an Appellate Tribunal if,- (a) he is an officer of Inland Revenue equivalent to the rank of Regional Commissioner; or (b) a Commissioner Inland Revenue or Commissioner Inland Revenue (Appeals) having at least five years experience as Commissioner or Collector.] (5) The Federal Government shall appoint a member of the Appellate Tribunal as Chairperson of the Tribunal and, except in special circumstances, the person appointed should be a judicial member. (6) The powers and functions of the Appellate Tribunal shall be exercised and discharged by Benches constituted from members of the Tribunal by the Chairperson of the Tribunal. (7) Subject to sub-section (8), a Bench shall consist of not less than two members of the Appellate Tribunal and shall be constituted so as to contain an equal number of judicial and accountant members, or so that the number of members of one class does not exceed the number of members of the other class by more than one. 2(8) The Federal Government may direct that all or any of the powers of the Appellate Tribunal shall be exercised by – (a) any one member; or (b) more members than one, jointly or severally. 3[(8A). Notwithstanding anything contained in sub-sections (7) and (8), the Chairman may constitute as many benches consisting of a single member as he may deem necessary to hear such cases or class of cases as the Federal Government may by order in writing, specify. (8AA). The Chairman or any other member of the Appellate Tribunal authorized, in this behalf by the Chairman may, sitting singly, dispose of any case where the amount of tax or penalty involved does not exceed five million rupees.] Sub-section (4) substituted vide the Finance Act, 2010, the replaced sub-section with detail is given below: [ (4) A person may be appointed as an accountant member of the Appellate Tribunal if the person is an officer of the Income Tax Group equivalent in rank to that of a Regional Commissioner and the Commissioner of Income Tax or Commissioner of Income Tax (Appeals) having at least five years experience as Commissioner shall also be eligible for appointment.] 1 Clause (4) substituted by the Finance, 2007, the omitted clause read as follows: (4) A person may be appointed as an accountant member of the Appellate Tribunal if the person is an officer of the Income Tax Group equivalent in rank to that of a Regional Commissioner[1]. 1 The words “of Income Tax” omitted by the Finance Ordinance, 2002 Ó EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. APPOINTMENT OF COMMISSIONER AS ACCOUNTANT MEMBER. [Section 130(4)] Section 130(4) has been substituted through Finance Act, 2007, in pursuant to which Commissioners and Commissioners of Income Tax (Appeals), having at least 5 years experience as Commissioner, are also eligible for appointment as accountant member of the Income Tax Appellate Tribunal. 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009CONSTITUTION OF BENCHES BY THE CHAIRMAN APPELLATE TRIBUNAL. [Section 130(8A) & (8AA)] A new sub-section (8A) has been inserted in section 130 of the Ordinance empowering the Chairman Appellate Tribunal to constitute as many Benches consisting of a single member as he may deem necessary to hear such cases or class of cases as the Federal Government may by order in writing specify. Besides, a new sub-section (8AA) has also been inserted in section 130 of the Ordinance to provide that the Chairman Appellate Tribunal or any other Member of the Appellate Tribunal authorized in this behalf by the Chairman may sitting singly dispose of any case where the amount of tax or penalty involved does not exceed Rs. 5 million. 3 Sub-sections (8A) and (8AA) inserted vide the Finance Act, 2009. 1 1 Ó 2010 – 2011 112 The Income Tax Ordinance, 2001 (9) Subject to sub-section (10), if the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority. (10) If the members of a 1[Bench] are equally divided on a point, they shall state the point on which they differ and the case shall be referred by the Chairperson for hearing on that point by one or more other members of the Appellate Tribunal, and the point shall be decided according to the opinion of the majority of the members of the Tribunal who have heard the case including those who first heard it. (11) If there are an equal number of members of the Appellate Tribunal, the Federal Government may appoint an additional member for the purpose of deciding the case on which there is a difference of opinion. (12) Subject to this Ordinance, the Appellate Tribunal shall have the power to regulate its own procedure, and the procedure of Benches of the Tribunal in all matters arising out of the discharge of its functions including the places at which the Benches shall hold their sittings. 131. Appeal to the Appellate Tribunal.- (1) Where the 2[taxpayer] or Commissioner objects to an order passed by the Commissioner (Appeals), the 3[taxpayer] or Commissioner may appeal to the Appellate Tribunal against such order. (2) An appeal under sub-section (1) shall be– (a) in the prescribed form; (b) verified in the prescribed manner; (c) accompanied 4[, except in case of an appeal preferred by the Commissioner,] by the prescribed fee specified in sub-section (3); and 5[(d) preferred to the Appellate Tribunal within sixty days of the date of service of order of the Commissioner (Appeals) on the taxpayer or the Commissioner, as the case may be.] 6[(3) The prescribed fee shall be ‘two’ thousand rupees.] (4) The Appellate Tribunal may, upon application in writing, admit an appeal after the expiration of the period specified in clause (d) of sub-section (2) if it is satisfied that the person appealing was prevented by sufficient cause from filing the appeal within that period. 7[(5) Notwithstanding that an appeal has been filed under this section, tax shall, unless recovery thereof has been stayed by the Appellate Tribunal, be payable in accordance with the assessment made in the case. Provided that where recovery of tax has been stayed by the Appellate Tribunal by an order, such order shall cease to have effect on the expiration of a period of three months following the date on which it is made, unless the appeal is decided, or such order be withdrawn by the Appellate Tribunal earlier: Substituted for the word “majority” by the Finance Ordinance, 2002. Substituted for the word “appellant” by the Finance Ordinance, 2002. 3 Substituted for the word “appellant” by the Finance Ordinance, 2002. 4 Substituted for the word “appellant” by the Finance Ordinance, 2002. 5 Substituted for the word “appellant” by the Finance Ordinance, 2002. 6 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009FEE FOR FILING OF APPEAL BEFORE APPELLATE TRIBUNAL. [section 131(3)] Upon recommendations of the committee on harmonization of different tax laws, amendment has been made in sub-section (3) of section 131 to fix the appeal fee at Rs. 2,000/- instead of determining the fee in relation to the tax assessed. Seb-section (3) substituted vide the Finance Act, 2009, the replaced text read as follows: (3) The prescribed fee shall be– (a) in the case of an appeal in relation to an assessment order, the lesser of two thousand five hundred rupees or ten percent of the tax assessed; or (b) in any other case – (i) where the appellant is a company, two thousand rupees; or (ii) where the appellant is not a company, five hundred rupees. 7 Sub-section (5) inserted by Finance Act, 2003 1 2 2010 – 2011 113 The Income Tax Ordinance, 2001 Provided further that the Appellate Tribunal shall not make an order which has the effect of staying the recovery of tax beyond the period of six months in aggregate.] 1[Provided further that the Appellate Tribunal may stay the recovery of the tax on filing the appeal which order will remain operative for thirty days and during which period a notice shall be issued to the respondent and after hearing the parties, order may be confirm or varied as the Tribunal deems fit but stay order shall in no case remain operative for more than one hundred and eighty days.] 132. Disposal of appeals by the Appellate Tribunal.- (1) The Appellate Tribunal may, before disposing of an appeal, call for such particulars as it may require in respect of the matters arising on the appeal or cause further enquiry to be made by the Commissioner. 2[(2) The Appellate Tribunal shall afford an opportunity of being heard to the parties to the appeal and, in case of default by any of the party on the date of hearing, the Tribunal may, if it deems fit, dismiss the appeal in default, or may proceed ex parte to decide the appeal on the basis of the available record.] 3[(2A) Ê The Appellate Tribunal shall decide the appeal within six months of its filing;] (3) Where the appeal relates to an assessment order, the Appellate Tribunal may, 4[without prejudice to the powers specified in sub-section (2),] make an order to – (a) affirm, modify or annul the assessment order; or 5[(b)] 6(c) remand the case to the Commissioner or the Commissioner (Appeals) for making such enquiry or taking such action as the Tribunal may direct.] (4) The Appellate Tribunal shall not increase the amount of any assessment 7[or penalty] or decrease the amount of any refund unless the taxpayer has been given a reasonable opportunity of showing cause against such increase or decrease, as the case may be. (5) Where, as the result of an appeal, any change is made in the assessment of an association of persons or a new assessment of an association of persons is ordered to be made, the Appellate Tribunal may authorise the Commissioner to amend accordingly any assessment order made on a member of the association and the time limit in sub-section (2) of section 122 shall not apply to the making of such amended assessment. 1 STAY OF DEMAND BY THE APPELLATE TRIBUNAL. [section 131(5)] A new proviso has been inserted in section 131 providing that the Appellate Tribunal may stay the recovery of tax on filing appeal which order will remain operative for 30 days during which period a notice shall be issued to the respondent and after hearing the parties order may be confirmed or altered as the Tribunal deems fit. However, stay order shall in no case remain operative for more than 180 days. Proviso inserted vide the Finance Act, 2009. 2 Substituted by the Finance Ordinance, 2002. The original sub-section (2) read as follows: “The Appellate Tribunal shall give both parties to the appeal an opportunity of being heard either in person or through an authorised representative.” 3 Inserted by the Finance Act, 2005. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. FIXATION OF TIME LIMIT FOR DISPOSAL OF APPEALS BY ITAT. Section 132 (2A)] A new sub-section (2A) has been added in section 132, fixing a time limit of six months for the disposal of appeals by the ITAT. This amendment shall be effective for appeals filed on or after July 01, 2005 and shall be applicable to appeals filed by the taxpayers as well as by the Department. 4 Inserted by the Finance Ordinance, 2002 5 Clause (b) omitted by the Finance Act, 2007, the old clause read as follows: (b) set aside the assessment order and direct the Commissioner to make a new assessment order in accordance with the directions or recommendations of the Tribunal 5[; or] 5 Substituted for full stop by the Finance Ordinance, 2002. 6 Added by the Finance Ordinance, 2002 7 Inserted by Finance Act, 2003 2010 – 2011 114 The Income Tax Ordinance, 2001 (6) Where the appeal relates to a decision other than in respect of an assessment, the Appellate Tribunal may make an order to affirm, vary or annul the decision, and issue such consequential directions as the case may require. 1[(7) The Appellate Tribunal shall communicate its order to the taxpayer and the Commissioner.] 2[(8)] 3[(9)] (10) Save as provided in section 133, the decision of the Appellate Tribunal on an appeal shall be final. [133. ÊReference to High Court.- (1) Within ninety days of the communication of the order of the Appellate Tribunal under sub-section (7) of section 132, the aggrieved person or the Commissioner may 4 1 Substituted by the Finance Ordinance, 2002. The original sub-section (7) read as follows: “(7) The Appellate Tribunal shall serve a notice of its order on the appellant and the Commissioner.” 2 Omitted by Finance Ordinance, 2002. The omitted sub-section (8) reads as follows: “(8) Where the Appellate Tribunal has not made an order in respect of an appeal before the expiration of six months from the end of the month in which the appeal was filed, the relief sought by the appellant in the appeal shall be treated as having been given and all the provisions of this Ordinance shall have effect accordingly.” 3 Omitted by the Finance Ordinance 2002. The omitted sub-section (9) read as follows: “(9) For the purposes of sub-section (8), any period during which the hearing of an appeal is adjourned on the request of the appellant shall be excluded in the computation of the period of six months referred to in that sub-section. Section 133 applicable to all applications preferred to the High Court from July 1, 2005 onwards. [IT Cir. No. 6 of 2005 dt. 19-805] 4 Substituted by the Finance Act, 2005. The original section 133 read as follows: 133. Reference to High Court.- (1) Where the Appellate Tribunal has made an order on an appeal under section132, the A[taxpayer] or Commissioner may, by application in such form and accompanied by such documents as may be prescribed, require the Appellate Tribunal to refer any question of law arising out of such order to the High Court. (2) An application under sub-section (1) shall be made within ninety days of the date on which the B[taxpayer] or Commissioner, as the case may be, was served with C[ ] the Appellate Tribunal’s order. (3) Where, on an application under sub-section (1), the Appellate Tribunal is satisfied that a question of law arises out of its order, it shall, within ninety days of receipt of the application, draw up a statement of the case and refer it to the High Court. (4) Where, on an application under sub-section (1), the Appellate Tribunal refuses to state the case on the ground that no question of law arises, the D[taxpayer] or the Commissioner, as the case may be, may apply to the High Court and the High Court may, if it is not satisfied with the correctness of the decision of the Appellate Tribunal, frame a question of law for its consideration. (5) An application under sub-section (4) shall be made within one-hundred and twenty days from the date on which the E[taxpayer] or Commissioner, as the case may be, was served with F[order] of the refusal. (6) Sub-sections (10) through (14) shall apply to a question of law framed by the High Court in the same manner as they apply to a reference made under sub-section (1). (7) If, on an application under sub-section (1), the Appellate Tribunal rejects the application on the ground that it is time-barred, the G[taxpayer] or Commissioner may apply to the High Court and, if the High Court is not satisfied with the correctness of the Appellate Tribunal’s decision, the Court may require the Appellate Tribunal to treat the application as made within the time allowed under subsection H[(2)]. (8) An application under sub-section (7) shall be made within I[ninety days] from the date on which the J[taxpayer] or Commissioner, as the case may be, was served with K[order] of the rejection. (9) If the High Court is not satisfied that the statement in a case referred under sub-section (3) is sufficient to enable it to determine the question raised thereby, the Court may refer the case back to the Appellate Tribunal to make such modification therein as the Court may direct. (10) A reference to the High Court under this section shall be heard by a Bench of not less than two Judges of the High Court and, in respect of the reference, the provisions of section 98 of the Code of Civil Procedure, 1908 (V of 1908) shall apply, so far as may be, notwithstanding anything contained in any other law for the time being in force. (11) The High Court upon hearing a reference under this section shall decide the questions of law raised by the reference and deliver judgment thereon containing the grounds on which such decision is founded. (12) A copy of the judgment of the High Court shall be sent under the seal of the Court and the signature of the Registrar to the Appellate Tribunal which shall pass such orders as are necessary to dispose of the case conformably to such judgment. (13) The costs of a reference to the High Court under this section shall be at the discretion of the Court. (14) Where a reference relates to an assessment, the tax due under the assessment shall be payable in accordance with the assessment, unless recovery of the tax has been stayed by the High Court. (15) Section 5 of the Limitation Act, 1908 (IX of 1908) shall apply to an application under sub-section (1). (16) An application under sub-section (1) by a person other than the Commissioner shall be accompanied by a fee of one hundred rupees.” A Substituted for the word “appellant” by the Finance Ordinance, 2002. B Substituted for the word “appellant” by the Finance Ordinance, 2002. C The words “notice of” omitted by the Finance Act, 2003. D Substituted for the word “appellant” by the Finance Ordinance, 2002. E Substituted for the word “appellant” by the Finance Ordinance, 2002. F Substituted for the word “notice” by the Finance Act, 2003. G Substituted for the word “appellant” by the Finance Ordinance, 2002. 2010 – 2011 115 The Income Tax Ordinance, 2001 prefer an application, in the prescribed form along with a statement of the case, to the High Court, stating any question of law arising out of such order. (2) The statement to the High Court referred to in sub-section (1), shall set out the facts, the determination of the Appellate Tribunal and the question of law which arises out of its order. (3) Where, on an application made under sub-section (1), the High Court is satisfied that a question of law arises out of the order referred to in sub-section (1), it may proceed to hear the case. (4) A reference to the High Court under this section shall be heard by a Bench of not less than two judges of the High Court and, in respect of the reference, the provisions of section 98 of the Code of Civil Procedure, 1908 (Act V of 1908), shall apply, so far as may be, notwithstanding anything contained in any other law for the time being in force. (5) The High Court upon hearing a reference under this section shall decide the question of law raised by the reference and pass judgment thereon specifying the grounds on which such judgment is based and the Tribunal’s order shall stand modified accordingly. The Court shall send a copy of the judgment under the seal of the Court to the Appellate Tribunal. (6) Notwithstanding that a reference has been made to the High Court, the tax shall be payable in accordance with the order of the Appellate Tribunal: Provided that, if the amount of tax is reduced as a result of the judgment in the reference by the High Court and the amount of tax found refundable, the High Court may, on application by the Commissioner within thirty days of the receipt of the judgment of the High Court that he wants to prefer petition for leave to appeal to the Supreme Court, make an order authorizing the Commissioner to postpone the refund until the disposal of the appeal by the Supreme Court. (7) Where recovery of tax has been stayed by the High Court by an order, such order shall cease to have effect on the expiration of a period of six months following the day on which it was made unless the appeal is decided or such order is withdrawn by the High Court earlier. (8) Section 5 of the Limitation Act, 1908 (IX of 1908), shall apply to an application made to the High Court under sub-section (1). (9) An application under sub-section (1) by a person other than the Commissioner shall be accompanied by a fee of one hundred rupees.] 1[ ]Ê Substituted for the brackets and figures “(1)” by the Finance Act, 2003. Substituted for the words “three months” by the Finance Ordinance, 2002. J Substituted for the word “appellant” by the Finance Ordinance, 2002. k Substituted for the word “notice” by the Finance Act, 2003. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. DIRECT REFERENCE TO HIGH COURT. [Section 133] Section 133 has been substituted to provide for a direct reference to the High Court, which shall decide whether a question of law arises and then shall proceed to hear the case. A further provision has been made whereby, the High Court can authorize the Commissioner to postpone the payment of refund arising as a result of an order by the High Court, till the disposal of appeal by the Supreme Court. Amendment has also been made to the effect that a stay of recovery granted by the High Court shall be automatically vacated at the expiry of the period of six months, unless the order for stay is withdrawn or the reference is decided at an earlier date. 1 Omitted by the Finance Act, 2005. The omitted section 134 read as follows: “134. Appeal to Supreme Court.- (1) An appeal shall lie to the Supreme Court from any judgment of the High Court delivered on a reference made or question of law framed under section 133 in any case which the High Court certifies to be a fit one for appeal to the Supreme Court. (2) The provisions of the Code of Civil Procedure, 1908 (V of 1908), relating to appeals to the Supreme Court shall apply, so far as may be, in the case of an appeal under this section in like manner as they apply in the case of an appeal from decrees of a High Court. (3) Where the judgment of the High Court is varied or A[reversed] in appeal under this section, effect shall be given to the order of the Supreme Court in the manner provided in sub-section B[(12)] of section 133 in the case of a judgment of the High Court. (4) The provisions of sub-sections (11), (12) and (13) of section 133 shall apply in the case of an appeal to the Supreme Court made under this section as they apply to an appeal to the High Court under section 133.” A Substituted for the word “reserved” by the Finance Act, 2003. B Substituted for the brackets and figures “(10)” by the Finance Act, 2003. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. H I 2010 – 2011 116 The Income Tax Ordinance, 2001 1[134A. 2 3 4[Alternative] Dispute Resolution.- 5[(1) Notwithstanding any other provision of this Ordinance or the rules made thereunder an aggrieved person, in connection with any matter pending before an Appellate Authority, may apply to Board for the appointment of a committee for the resolution of any hardship or dispute mentioned in detail in the application 6[except where prosecution proceedings have been initiated or where interpretation of question of law having effect on identical other cases].] (2) The Federal Board of Revenue, after examination of the application of an aggrieved person, shall sixty days of receipt of such application in the Board] appoint a committee consisting of an officer of 8[Inland Revenue] and two persons from a 9[panel comprising] of Chartered or Cost Accountants, Advocates, Income Tax Practitioners or reputable taxpayers for the resolution of the hardship or dispute. 7[within 10[(3) The Committee constituted under sub-section (2) shall examine the issue and may if it deem fit necessary conduct inquiry seek expert opinion, direct any officer of the 11[Inland Revenue] or any other person to conduct an audit and shall make recommendations within ninety days of its constitution in respect of the resolution of the dispute. If the committee fails to make recommendations within the said period the Board shall dissolve the committee and constitute a new committee which shall decide the matter within a further period of ninety days. If after the expiry of that period the dispute is not resolved the matter shall be taken up by the appropriate forum for decision.] (4) The Federal Board of Revenue may, on the recommendation of the committee, pass such order, as it may deem appropriate 12[within forty five days of the receipt of recommendations of the committee]. DELETION OF PROVISION REGARDING APPEAL TO SUPREME COURT. [Section 134] Section 134 of the Income Tax Ordinance, 2001 incorporated right of appeal to Supreme Court both for the taxpayer and the department against any judgment of the High Court delivered on a reference made or question of law framed under section 133 in any case which the High Court certified to be a fit one for appeal to the Supreme Court. However, it was seen that Article 185 of the Constitution of Pakistan, 1973 also provided the right of filing of CPLA by any person, against the judgment of a High Court, to the Supreme Court. This section was considered as a duplication in the law. Therefore, section 134 has been omitted w.e.f. July 01, 2005. 1 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ALTERNATIVE DISPUTE RESOLUTION. [Section 134A] Through an amendment in section 134A(1) of the Ordinance, following conditions have been inserted which would make the section inapplicable. a) Where prosecution proceedings have been initiated. b) Applications which require interpretation of various question of law having effect on identical other cases. Further sub-section (3) has been substituted to provide that ADRC shall submit its recommendations within 90 days of its constitution. The Committee shall be dissolved by the FBR in case it fails to submit its recommendations within the stipulated period. In such cases the Board shall then constitute another committee and the reconstituted committee will be required to submit its recommendations in 90 days. If there is no decision the taxpayer may revert back to the appellate forum where the case is pending. Previously no time limit was specified for FBR to pass order on the recommendations made by the ADRC. Now FBR is required to pass an order as it deem appropriate within 45 days of the receipt of recommendations of ADRC. Added by the Finance Act, 2004. 2 Income Tax Cir. No. 1 dated the 1st July, 2006 PROVISIONS RELATING TO ALTERNATIVE DISPUTE RESOLUTION. [Section 134A] Under the existing scheme, a taxpayer can apply to the Central Board of Revenue for resolution of any hardship relating to income tax. Amendment has been made to specifically restrict the jurisdiction of such Committees to pending issues only meaning thereby that closed matters fall outside the ambit of ADRCs. 3 EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. RATIONALIZATION OF PROVISIONS FOR ALTERNATE DISPUTE RESOLUTION (ADR). [Section 134A] The purpose of introduction of Alternate Dispute Resolution mechanism was to provide a separate stream for dispute resolution apart from the normal appeal process. An apprehension was expressed by stakeholders that the language of sub-section (6) was ambiguous and not in consonance with the intent of the law. 4 Substituted for “Alternate” by the Finance Act, 2006. 5 Sub-section (1) substituted by the Finance Act, 2006. The old sub-section read as follows: (1) Notwithstanding any other provision of this Ordinance, or the rules made thereunder, any aggrieved person in connection with any matter of income tax pertaining to liability of income tax, admissibility of refund, waiver or fixation of penalty or fine, relaxation of any time period or procedural and technical condition may apply to the Central Board of Revenue for the appointment of a committee for the resolution of any hardship or dispute mentioned in detail in the application. 6 Words inserted vide the Finance Act, 2009. 7 Words inserted vide the Finance Act, 2009. 8 Substituted for “Income Tax” vide the Finance Act, 2010. 9 The words “notified panel” substituted by the Finance Act, 2005. 10 Sub-section (3) substituted vide the Finance Act, 2009, the replaced text read as follows: (3) The committee constituted under sub-section (2) shall examine the issue and may, if it deems necessary, conduct inquiry, seek expert opinion, direct any officer of Income Tax or any other person to conduct an audit and make recommendations in respect of the resolution of dispute as it may deem fit. 11 Substituted for “Income Tax” vide the Finance Act, 2010. 12 Words inserted vide the Finance Act, 2009. 2010 – 2011 117 The Income Tax Ordinance, 2001 1[(4A) Notwithstanding anything contained in sub-section (4), the Chairman Federal Board of Revenue Revenue may, on the application of an aggrieved person, for reasons to be recorded in writing, and on being satisfied that there is an error in order or decision, pass such order as may be deemed just and equitable.] (5) The aggrieved person may make the payment of income tax and other taxes as determined by the Federal Board of Revenue in its order under sub-section (4) and all decisions, orders and judgements made or passed shall stand modified to that extent and all proceedings under this Ordinance or the rules made thereunder by any authority shall abate: Provided that, [2] an 3[order passed by] the Board in the light of recommendations of the committee shall be submitted before that authority, tribunal or the court 4[where the matter is subjudice] for for consideration and orders as deemed appropriate5[:] 6[Provided further that if the taxpayer is not satisfied with the said order, he may continue to pursue his remedy before the relevant authority, tribunal or court as if no such order had been made by the Board.] 7[ ] (7) The Board may, by notification in the official Gazette, make rules for carrying out the purposes of this section.] 135. 8[ ] 136. Burden of proof.- In any appeal 9[by a taxpayer] under this Part, the burden shall be on the taxpayer to prove, on the balance of probabilities – (a) in the case of an assessment order, the extent to which the order does not correctly reflect the taxpayer’s tax liability for the tax year; or (b) in the case of any other decision, that the decision is erroneous. Sub-section (4A) inserted by the Finance Act, 2008. Words “in case the matter is already sub-judice before any authority or tribunal or the court,” omitted by the Finance Act, 2006. 3 The words “agreement made between the aggrieved person and” substituted by the Finance Act, 2005. 4 Words inserted by the Finance Act, 2006. 5 The full stop substituted by the Finance Act, 2005. 6 Inserted by the Finance Act, 2005. 7 Omitted by the Finance Act, 2005. The omitted sub-section (6) read as follows: “(6) In case the aggrieved person is not satisfied with the orders of the Central Board of Revenue, he may file an appeal or reference with the appropriate authority, tribunal or court under the relevant provisions of this Ordinance within a period of sixty days of the order passed by the Board under this section has been communicated to the aggrieved person.” 8 Omitted by the Finance Ordinance, 2002. The omitted section 135 read as follows: “135. Revision by the Commissioner.- (1) The Commissioner may either of the Commissioner’s own motion or on application in writing by a person for revision, call for the record of any proceeding under this Ordinance in which an order has been passed by any taxation officer other than the Commissioner (Appeals). (2) Subject to sub-section (3), where, after making such inquiry as is necessary, Commissioner considers that the order requires revision, the Commissioner may make such revision to the order as the Commissioner thinks fit. (3) An order under sub-section (2) shall not be prejudicial to the person to whom the order relates. (4) The Commissioner shall not revise any order under sub-section (2) if – (a) where an appeal against the order lies to the Commissioner (Appeals) or to the Appellate Tribunal, the time within which such appeal may be made has not expired, or the person has not waived their right of appeal; (b) the order is pending on appeal before the Commissioner (Appeals) or has been made the subject of an appeal to the Appellate Tribunal; or (c) in the case of an application made by a person, the application has not been made within ninety days of the date on which such order was served on the person, unless the Commissioner is satisfied that the person was prevented by sufficient cause from making the application within the time allowed. (5) No application for revision of an assessment order may be made under sub-section (1) unless the amount of tax due under the assessment that is not in dispute has been paid by the taxpayer. (6) An application under sub-section (1) shall be accompanied by – (a) in relation to an assessment order, a fee of the lesser of two thousand five hundred rupees or ten percent of the tax assessed; or (b) in any other case – (i) where the applicant is a company, a fee of two thousand rupees; or (ii) where the applicant is not a company, a fee of five hundred rupees. (7) An order by the Commissioner declining to interfere shall not be treated as an order prejudicial to the applicant. 9 Inserted by Finance Act, 2003 1 2 2010 – 2011 118 The Income Tax Ordinance, 2001 PART IV COLLECTION AND RECOVERY OF TAX 137. Due date for payment of tax.- (1) The tax payable by a taxpayer on the taxable income of the taxpayer 1[including the tax payable under [2] 3[section 4[113 or] 113A]] for a tax year shall be due on the due date for furnishing the taxpayer’s return of income for that year. 5[(2) Where any tax is payable under an assessment order or an amended assessment order or any other order issued by the Commissioner under this Ordinance, a notice shall be served upon the taxpayer in the prescribed form specifying the amount payable and thereupon the sum so specified shall be paid within 6[fifteen] days from the date of service of the notice]7[: Provided that the tax payable as a result of provisional assessment under section 122C, as specified in the notice under sub-section (2) shall be payable after a period of sixty days from the date of service of the notice.] (3) Nothing in sub-section (2) 8[or (4)] shall affect the operation of sub-section (1). (4) Upon written application by a taxpayer, the Commissioner may, where good cause is shown, grant the taxpayer an extension of time for payment of tax due 9[under sub-section (2)] or allow the taxpayer to pay 10[such tax] in instalments of equal or varying amounts as the Commissioner may determine having regard to the circumstances of the case. (5) Where a taxpayer is permitted to pay tax by instalments and the taxpayer defaults in payment of any instalment, the whole balance of the tax outstanding shall become immediately payable. (6) The grant of an extension of time to pay tax due or the grant of permission to pay tax due by instalments shall not preclude the liability for 11[default surcharge] arising under section 205 from the due date of the tax under sub-section 12[(2)]. (7) 13[ ] 14[138. Recovery of tax out of property and through arrest of taxpayer.- (1) For the purpose of recovering any tax due by a taxpayer, the Commissioner may serve upon the taxpayer a notice in the prescribed form requiring him to pay the said amount within such time as may be specified in the notice. Words inserted by Finance Act, 2003 Words “section 113 or” omitted by the Finance Act, 2008. 3 Inserted by the Finance Act, 2004. 4 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009PAYMENT OF TAX U/S 113 ALONGWITH THE RETURN. [Section 137] With the re-introduction of minimum tax u/s 113, taxpayers are required to pay the liability u/s 113 along with the return. Inserted vide the Finance Act, 2009. 5 Sub-section (2) substituted for “(2) Where an assessment order or amended assessment order is issued by the Commissioner, the tax payable under the order shall be payable within fifteen days from the date of the assessment order is issued. “ by Finance Act, 2003 6 Substituted for “thirty” by the Finance Act, 2008. 7 Colon substituted for full stop and proviso inserted vide the Finance Act, 2010. 8 Word, brackets and figures inserted by Finance Act, 2003 9 Inserted by Finance Act, 2003 10 Substituted for “any tax due” by Finance Act, 2003 11 Substituted for “additional tax” vide the Finance Act, 2010. 12 Substituted for “(1)” by Finance Act, 2003 13 Omitted by the Finance Ordinance, 2002. The omitted sub-section reads as under: “(7) A taxpayer dissatisfied with a decision under sub-section (4) may challenge the decision only under Part III of this Chapter.” 14 Substituted by Finance Ordinance, 2002. The original section 138 read as follows: “138. Tax as a debt due to the Federal Government.- (1) Any tax due under this Ordinance by a taxpayer shall be a debt due to the Federal Government and shall be payable in the manner and at the place prescribed. (2) Any tax that has not been paid by the due date may be sued for and recovered in any court of competent jurisdiction by the Commissioner acting in the Commissioner’s official name. 1 2 2010 – 2011 119 The Income Tax Ordinance, 2001 (2) If the amount referred to in the notice issued under sub-section (1) is not paid within the time specified therein or within the further time, if any, allowed by the Commissioner, the Commissioner may proceed to recover from the taxpayer the said amount by one or more of the following modes, namely:(a) attachment and sale of any movable or immovable property of the taxpayer; (b) appointment of a receiver for the management of the movable or immovable property of the taxpayer; and (c) arrest of the taxpayer and his detention in prison for a period not exceeding six months. (3) For the purposes of recovery of tax under sub-section (2), the Commissioner shall have the same powers as a Civil Court has under the Code of Civil Procedure, 1908 (Act V of 1908), for the purposes of the recovery of any amount due under a decree. (4) The Federal Board of Revenue may make rules regulating the procedure for the recovery of tax under this section and any other matter connected with, or incidental to, the operation of this section.] 1[138A. Recovery of tax by District Officer (Revenue).- (1) The Commissioner may forward to the District Officer (Revenue) of the district in which the taxpayer resides or carries on business or in which any property belonging to the taxpayer is situated, a certificate specifying the amount of any tax due from the taxpayer, and, on receipt of such certificate, the District Officer (Revenue) shall proceed to recover from the taxpayer the amount so specified as, it were an arrear of land revenue. (2) Without prejudice to any other power of the District Officer (Revenue) in this behalf, he shall have the same powers as a Civil Court has under the Code of Civil Procedure, 1908 (Act V of 1908), for the purpose of the recovery of the amount due under a decree.] 2[138B. Estate in bankruptcy.— (1) If a taxpayer is declared bankrupt, the tax liability under this Ordinance shall pass on to the estate in bankruptcy. (2) If tax liability is incurred by an estate in bankruptcy, the tax shall be deemed to be a current expenditure in the operations of the estate in bankruptcy and shall be paid before the claims preferred by other creditors are settled.] 139. Collection of tax in the case of private companies and associations of persons.- (1) Notwithstanding anything in the Companies Ordinance, 1984 (XLVII of 1984), where any tax payable by a private company (including a private company that has been wound up or gone into liquidation) in respect of any tax year cannot be recovered from the company, every person who was, at any time in that tax year – (a) a director of the company, other than an employed director; or (b) a shareholder in the company owning not less than ten per cent of the paid-up capital of the company, shall be jointly and severally liable for payment of the tax due by the company. (2) Any director who pays tax under sub-section (1) shall be entitled to recover the tax paid from the company or a share of the tax from any other director. (3) In any suit under sub-section (2), the production of a certificate signed by the Commissioner stating the name and address of the taxpayer and the amount of tax due shall be conclusive evidence of the amount of tax due by such taxpayer.” 1 Inserted by the Finance Ordinance, 2002. 2 Section 138B added vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 ESTATE IN BANKRUPTCY [Section 138B]. In order to safeguard the interest of revenue in cases of bankruptcy, a new section 138B in the Income Tax Ordinance, 2001 has been introduced through which if a taxpayer is declared bankrupt, his income tax liability will be passed on to the taxpayer estate in bankruptcy. It has also been provided that in such cases income tax liability shall be paid in preference over the claims of other creditors against such estate in bankruptcy and such payment of income tax shall be deemed to be an expenditure of current nature in the operations of the estate in bankruptcy. 2010 – 2011 120 The Income Tax Ordinance, 2001 (3) A shareholder who pays tax under sub-section (1) shall be entitled to recover the tax paid from the company or from any other shareholder to whom clause (b) of sub-section (1) applies in proportion to the shares owned by that other shareholder. (4) Notwithstanding anything in any law, where any tax payable by a member of an association of persons in respect of the member’s share of the income of the association in respect of any tax year cannot be recovered from the member, the association shall be liable for the tax due by the member. (5) The provisions of this Ordinance shall apply to any amount due under this section as if it were tax due under an assessment order. 140. Recovery of tax from persons holding money on behalf of a taxpayer.- (1) For the purpose of recovering any tax due by a taxpayer, the Commissioner may, by notice, in writing, require any person – (a) owing or who may owe money to the taxpayer; or (b) holding or who may hold money for, or on account of the taxpayer; (c) holding or who may hold money on account of some other person for payment to the taxpayer; or (d) having authority of some other person to pay money to the taxpayer, to pay to the Commissioner so much of the money as set out in the notice by the date set out in the notice. (2) Subject to sub-section (3), the amount set out in a notice under sub-section (1) – (a) where the amount of the money is equal to or less than the amount of tax due by the taxpayer, shall not exceed the amount of the money; or (b) in any other case, shall be so much of the money as is sufficient to pay the amount of tax due by the taxpayer. (3) Where a person is liable to make a series of payments (such as salary) to a taxpayer, a notice under sub-section (1) may specify an amount to be paid out of each payment until the amount of tax due by the taxpayer has been paid. (4) The date for payment specified in a notice under sub-section (1) shall not be a date before the money becomes payable to the taxpayer or held on the taxpayer’s behalf. (5) The provisions of sections 160, 161, 162 and 163, so far as may be, shall apply to an amount due under this section as if the amount were required to be deducted from a payment under Division III of Part V of this Chapter. (6) Any person who has paid any amount in compliance with a notice under sub-section (1) shall be treated as having paid such amount under the authority of the taxpayer and the receipt of the Commissioner constitutes a good and sufficient discharge of the liability of such person to the taxpayer to the extent of the amount referred to in such receipt. 1[(7) (8) (9) ] 1 Sub-sections (7), (8) and (9) read as follows “(7) Where an amount has been paid under sub-section (1), the taxpayer shall be allowed a tax credit for the amount (unless the amount paid represents a final tax on the taxpayer’s income) in computing the tax due by the taxpayer on the taxpayer’s taxable income for the tax year in which the amount was paid. (8) The tax credit allowed under this section shall be applied in accordance with sub-section (3) of section 4. (9) A tax credit or part of a tax credit allowed under this section for a tax year that is not able to be credited under sub-section (3) of section 4 for the year must be refunded to the taxpayer in accordance with section 170.” omitted by Finance Act, 2003 2010 – 2011 (10) 141. 121 The Income Tax Ordinance, 2001 In this section, "person" includes any Court, Tribunal or any other authority. Liquidators.- (1) Every person (hereinafter referred to as a “liquidator”) who is – (a) a liquidator of a company; (b) a receiver appointed by a Court or appointed out of Court; (c) a trustee for a bankrupt; or (d) a mortgagee in possession, shall, within fourteen days of being appointed or taking possession of an asset in Pakistan, whichever occurs first, give written notice thereof to the Commissioner. (2) The Commissioner shall, within three months of being notified under sub-section (1), notify the liquidator in writing of the amount which appears to the Commissioner to be sufficient to provide for any tax which is or will become payable by the person whose assets are in the possession of the liquidator. (3) A liquidator shall not, without leave of the Commissioner, part with any asset held as liquidator until the liquidator has been notified under sub-section (2). (4) A liquidator - (a) shall set aside, out of the proceeds of sale of any asset by the liquidator, the amount notified by the Commissioner under sub-section (2), or such lesser amount as is subsequently agreed to by the Commissioner; (b) shall be liable to the extent of the amount set aside for the tax of the person who owned the asset; and (c) may pay any debt that has priority over the tax referred to in this section notwithstanding any provision of this section. (5) A liquidator shall be personally liable to the extent of any amount required to be set aside under sub-section (4) for the tax referred to in sub-section (2) if, and to the extent that, the liquidator fails to comply with the requirements of this section. (6) Where the proceeds of sale of any asset are less than the amount notified by the Commissioner under sub-section (2), the application of sub-sections (4) and (5) shall be limited to the proceeds of sale. (7) This section shall have effect notwithstanding anything contained in any other law for the time being in force. (8) The provisions of this Ordinance shall apply to any amount due under this section as if it were tax due under an assessment order. 142. Recovery of tax due by non-resident member of an association of persons.- (1) The tax due by a non-resident member of an association of persons in respect of the member’s share of the profits of the association shall be assessable in the name of the association or of any resident member of the association and may be recovered out of the assets of the association or from the resident member personally. (2) A person making a payment under this section shall be treated as acting under the authority of the non-resident member and is hereby indemnified in respect of the payment against all proceedings, civil or criminal, and all processes, judicial or extra-judicial, notwithstanding any provisions to the contrary in any written law, contract or agreement. (3) The provisions of this Ordinance shall apply to any amount due under this section as if it were tax due under an assessment order. 2010 – 2011 122 The Income Tax Ordinance, 2001 143. Non-resident ship owner or charterer.- (1) Before the departure of a ship owned or chartered by a non-resident person from any port in Pakistan, the master of the ship shall furnish to the Commissioner a return showing the gross amount specified in sub-section (1) of section 7 in respect of the ship. (2) Where the master of a ship has furnished a return under sub-section (1), the Commissioner shall after calling for such particulars, accounts or documents as he may require,] determine the amount of tax due under section 7 in respect of the ship and, as soon as possible, notify the master, in writing, of the amount payable. 1[, (3) The master of a ship shall be liable for the tax notified under sub-section (2) and the provisions of this Ordinance shall apply to such tax as if it were tax due under an assessment order. (4) Where the Commissioner is satisfied that the master of a ship or non-resident owner or charterer of the ship is unable to furnish the return required under sub-section (1) before the departure of the ship from a port in Pakistan, the Commissioner may allow the return to be furnished within thirty days of departure of the ship provided the non-resident owner or charterer has made satisfactory arrangements for the payment of the tax due under section 7 in respect of the ship. (5) The Collector of Customs or other authorised officer shall not grant a port clearance for a ship owned or chartered by a non-resident person until the Collector or officer is satisfied that any tax due under section 7 in respect of the ship has been paid or that arrangements for its payment have been made to the satisfaction of the Commissioner. (6) This section shall not relieve the non-resident owner or charterer of the ship from liability to pay any tax due under this section that is not paid by the master of the ship. 144. Non-resident aircraft owner or charterer.- (1) A non-resident owner or charterer of an aircraft 2[ ]liable for tax under section 7, or an agent authorised by the non-resident person for this purpose, shall furnish to the Commissioner, within forty-five days from the last day of each quarter of the financial year, a return, in respect of the quarter, showing the gross amount specified in sub-section (1) of section 7 of the non-resident person for the quarter. (2) Where a return has been furnished under sub-section (1), the Commissioner shall 3[, after calling for such particulars, accounts or documents as he may require,] determine the amount of tax due under section 7 by the non-resident person for the quarter and notify the non-resident person, in writing, of the amount payable. (3) The non-resident person shall be liable to pay the tax notified under sub-section (2) within the time specified in the notice and the provisions of this Ordinance shall apply to such tax as if it were tax due under an assessment order. (4) Where the tax referred to in sub-section (3) is not paid within three months of service of the notice, the Commissioner may issue to the authority by whom clearance may be granted to the aircraft operated by the non-resident person a certificate specifying the name of the non-resident person and the amount of tax due. (5) The authority to whom a certificate is issued under sub-section (4) shall refuse clearance from any airport in Pakistan to any aircraft owned or chartered by the non-resident until the tax due has been paid. 4[145 Assessment of persons about to leave Pakistan.- (1) Where any person is likely to leave Pakistan during the currency of tax year or shortly after its expiry with no intention of returning to Inserted by the Finance Ordinance, 2002. Words “shall be” omitted by Finance Act, 2003 3 Inserted by the Finance Ordinance, 2002 4 Section 145 substituted for “145. Collection of tax from persons leaving Pakistan permanently.- (1) Where the Commissioner has reasonable grounds to believe that a person may leave Pakistan permanently without paying tax due under this Ordinance, the Commissioner may issue a 1 2 2010 – 2011 123 The Income Tax Ordinance, 2001 Pakistan, he shall give to the Commissioner a notice to that effect not less than fifteen days before the probable date of his departure (hereinafter in this section referred to as the ‘said date’). (2) The notice under sub-section (1) shall be accompanied by a return or returns of taxable income in respect of the period commencing from the end of the latest tax year for which an assessment has been or, where no such assessment has been made, a return has been made, as the case may be, and ending on the said date, or where no such assessment or return has been made, the tax year or tax years comprising the period ending on the said date; and the period commencing from the end of the latest tax year to the said date shall, for the purposes of this section, be deemed to be a tax year (distinct and separate from any other tax year) in which the said date falls. (3) Notwithstanding anything contained in sub-sections (1) and (2), the Commissioner may serve a notice on any person who, in his opinion, is likely to leave Pakistan during the current tax year or shortly after its expiry and has no intention of returning to Pakistan, to furnish within such time as may be specified in such notice, a return or returns of taxable income for the tax year or tax years for which the taxpayer is required to furnish such return or returns under sub-section (2). (4) The taxable income shall be charged to tax at the rates applicable to the relevant tax year and all the provisions of this Ordinance shall, so far as may be, apply accordingly.] ∇ 146. Recovery of tax from persons assessed in Azad Jammu and Kashmir.- (1) Where any person assessed to tax for any tax year under the law relating to income tax in the Azad Jammu and Kashmir has failed to pay the tax and the income tax authorities of the Azad Jammu and Kashmir cannot recover the tax because – (a) the person’s residence is in Pakistan; or (b) the person has no movable or immovable property in the Azad Jammu and Kashmir, the Deputy Commissioner in the Azad Jammu and Kashmir may forward a certificate of recovery to the Commissioner and, on receipt of such certificate, the Commissioner shall recover the tax referred to in the certificate in accordance with this Part. (2) A certificate of recovery under sub-section (1) shall be in the prescribed form specifying – (a) the place of residence of the person in Pakistan; (b) the description and location of movable or immovable property of the person in Pakistan; and (c) the amount of tax payable by the person. 1[146A. Initiation, validity, etc., of recovery proceedings.- (1) Any proceedings for the recovery of tax under this Part may be initiated at any time. certificate containing particulars of the tax due to the Commissioner of Immigration and request the Commissioner of Immigration to prevent that person from leaving Pakistan until that person (a) makes payment of tax in full; or (b) makes an arrangement satisfactory to the Commissioner for payment of the tax due. (2) A copy of a certificate issued under sub-section (1) shall be served on the person named in the certificate if it is practicable to do so. (3) Payment of the tax specified in the certificate to a customs or immigration officer or the production of a certificate signed by the Commissioner stating that the tax has been paid or satisfactory arrangements for payment have been made shall be sufficient authority for allowing the person to leave Pakistan.” By Finance Act, 2003 ∇ EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008SCHEME FOR WAIVER OF ADDITIONAL TAX, PENALTY ETC. ON PAYMENT OF PRINCIPAL AMOUNT OF TAX IN ARREARS. [Section 146]. At present, tax arrears of Rs.20.25 billion are outstanding. Similarly tax withheld by the withholding agent at times is not deposited due to fear of additional tax and levy of penalty. In order to effect speedy recovery of such tax arrears an opportunity has been provided to the defaulter taxpayers and withholding agents to settle the arrears under Tax Arrears Settlement Incentive Scheme (TASIS) 2008. Under this scheme, if the taxpayer pays the principal outstanding tax liability, surcharge, additional tax or penalty levied or leviable on such amount would be waived off and a certificate of settlement of arrears shall be issued to the taxpayer. The TASIS has been issued vide Circular No.04 of 2008 dated July 1, 2008. 1 Inserted by the Finance Ordinance, 2002. 2010 – 2011 124 The Income Tax Ordinance, 2001 (2) The Commissioner may, at any time, amend the certificate issued under section 138A, or recall such certificate and issue fresh certificate, as he thinks fit. (3) It shall not be open to a taxpayer to question before the District Officer (Revenue) the validity or correctness of any certificate issued under section 138A, or any such certificate as amended, or any fresh certificate issued, under sub-section (2). (4) The several modes of recovery provided in this Part shall be deemed to be neither mutually exclusive nor affect in any way any other law for the time being in force relating to the recovery of debts due to the Government and the Commissioner may have recourse to any such mode of recovery notwithstanding that the tax due is being recovered from a taxpayer by any other mode.] 1[146B. Tax arrears settlement incentives scheme.—(1) Subject to provisions of this Ordinance, the Board may make scheme in respect of recovery of tax arrears or withholding taxes and waiver of 2[default surcharge] or penalty levied thereon. (2) The Board may make rules under section 237 for implementation of such scheme.] 1 2 Section 146B inserted by the Finance Act, 2008. Substituted for “additional tax” vide the Finance Act, 2010. 2010 – 2011 125 The Income Tax Ordinance, 2001 PART V ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE Division I Advance Tax Paid by the Taxpayer Ð Â 147. Advance tax paid by the taxpayer. (1) Subject to sub-section (2), every taxpayer 1[whose income was charged to tax for the latest tax year under this Ordinance or latest assessment year under the repealed Ordinance] other than – Ð INCOME TAX Circular No. 10 dated the the July 16, 2010 ADVANCE TAX PAID BY THE TAXPAYER [Section 147]. Through amendments in section 147 of the Income Tax Ordinance, 2001 following changes have been brought in the advance tax regime:(i) Exemption on capital gains available for the purposes of this section has been omitted [clause (a) of sub-section (1) has been omitted] ; (ii) Association of Persons (AOPs), with annual turnover of Rupees Fifty Million and above, has also been made liable to pay advance tax under section 147 (sub-sections (2) & (4) amended); (iii) Basic income threshold for the purposes of payment of advance tax under this section has been raised from two hundred thousand rupees to five hundred thousand rupees (sub-section (2) amended); and (iv) In order to ensure timely payment of advance tax during the relevant quarter, sub-section (5A) has been substituted to prescribe the amended dates for payment of quarterly advance tax as under:(a) in respect of the September quarter, on or before the 25th day of September; (b) in respect of the December quarter, on or before the 25th day of December; (c) in respect of the March quarter, on or before the 25th day of March; and (d) in respect of the June quarter, on or before the 15th day of June. Rates of quarterly adjustable advance tax on capital gains from disposal/redemption of securities – Not applicable to individualinvestors. (Sub-section (5B) of section of section 147) – S.No Period Rate of Advance Tax 1. holding period of a security is less than six 2% of the capital gains derived during the quarter months 2. Where holding period of a security is more 1.5% of the capital gains derived during the quarter than six months but less than twelve moths EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009PAYMENT OF ADVANCE TAX. [Section 147) In case of a company, the mode of determining advance tax liability u/s 147 has been amended and now it is payable on turnover basis as per following formula. (A x B/C) – D whereas: A is the taxpayer’s turnover for the quarter; B is the tax assessed to the taxpayer for the latest tax year; C is the taxpayer’s turnover for the latest tax year; and D is the tax paid during the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 155. Since the actual amount of turnover will not be available on the due date prescribed under sub-section (5), therefore, a new subsection (5A) has been inserted whereby following schedule for advance tax payment has been given. th a) in respect of the September quarter, on or before the 15 day of October. th b) in respect of the December quarter, on or before the 15 day of January. th c) in respect of the March quarter, on or before the 15 day of April; and th d) in respect of the June quarter, on or before the 15 day of June. The taxpayer shall also be required to take into consideration tax u/s 113 while computing tax liability u/s 147. Further, advance tax is also payable, in the absence of last assessed income or declared turnover on the basis of tax liability under section 113. Example-I A is the taxpayer’s turnover for the quarter; Rs.1,000,000 B is the tax assessed to the taxpayer for the latest tax year; Rs.100,000 C is the taxpayer’s turnover for the latest tax year; and Rs. 4,000,000 D is the tax paid in the quarter for which a tax credit is allowed under section Rs. Nil 168, other than tax deducted under section 155 Tax payable for the quarter [(A x B/C) – D] Rs. 25,000 Example-II A B C D is the taxpayer’s turnover for the quarter; is the tax assessed to the taxpayer for the latest tax year; is the taxpayer’s turnover for the latest tax year; and is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 155 Rs.1,000,000 Rs.100,000 Rs. 4,000,000 Rs. 15,000 Tax payable for the quarter [(A x B/C) – D] EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. ADVANCE TAX PAYMENT BY COMPANIES. [Section 147(4AA) & (6A)] Rs. 10,000 2010 – 2011 126 The Income Tax Ordinance, 2001 (a) [2] (b) income chargeable to tax under sections 5, 6 and 7; 3[ba) income chargeable to tax under section 15;] (c) income subject to deduction of tax at source under section 149; 4[and] 5[(ca)] (d) income from which tax has been collected under Division II or deducted under Division III 6[or deducted or collected under Chapter XII] and for which no tax credit is allowed as a result of sub-section (3) of section 168, shall be liable to pay advance tax for the year in accordance with this section. (2) This section does not apply to an individual 7[8] where the individual’s 9[or association of persons] latest assessed taxable income excluding income referred to in clauses (a), (b), 10[(ba),] (c) and (d) of sub-section (1) is less than 11[12[five] hundred thousand] rupees. 13[(c)] 14[(4) Where the taxpayer is 1[an association of persons or] a company, the amount of advance tax due due for a quarter shall be computed according to the following formula, namely:– The law requires payment of advance tax in 4 quarterly installments which is worked out on the basis of the last assessed income. Where taxpayers do not have last assessed income, they were not required to pay advance tax. To cater for such eventuality, new subsections (4AA) and (6A) have been inserted in section 147 requiring companies to take into account minimum tax paid or payable under section 113 also. Advance tax will be payable even if there is no last assessed income. Thus a company having – (a) last assessed loss; (b) current year’s loss; or (c) no previous assessment; is now obliged to pay advance tax on the basis of estimated quarterly accounting profit. Provisions of sub-sections (4AA) and (6A) are applicable from 1st July 2007. Â Income Tax Cir. No. 1 dated the 1st July, 2006 RATIONALIZATION OF ADVANCE TAX ESTIMATE REGIME. [Section 147] Under the existing regime, Advance Tax is payable on the basis of the last assessed income of the taxpayer, even when income for the current year is higher. In order to overcome this anomaly, advance tax has been made mandatory for a company on the basis of current year’s estimated income if it is more than the last assessed income. 1 Substituted for “who derives or expects to derive income chargeable to tax under this Ordinance in a tax year” by Finance Act, 2003 2 Clause (a) omitted vide the Finance Act, 2010. 3 Inserted by the Finance Ordinance, 2002. 4 Substituted for “or” vide the Finance Act, 2009. 5 Clause (ca) inserted vide the Fianance Act, 2006, omitted vide the Finance Act, 2009, the omitted clause read as follows: 5[(ca) income chargeable to tax under section 233 and clauses (a) and (b) of sub-section (1) of section 233A;] 6 Words inserted vide the Finance Act, 2009. 7 Inserted by the Finance Act, 2004. 8 Words “or 8[association of persons]8 as substituted by the Finance Act, 2005, omitted by the Finance Act, 2010. 9 Inserted by the Finance Act, 2004. 10 Inserted by the Finance Ordinance, 2002. 11 Substituted for “one hundred and fifty thousand” by Finance Act, 2003 12 Substituted for “two” vide the Finance Act, 2010. 13 Omitted by the Finance Act, 2004. The omitted sub-section (3) read as follows: “(3) Advance tax shall be payable by a taxpayer in respect of the following periods, namely:– (a) 1st of July to 30th September (referred to as the “September quarter”); (b) 1st October to 31st December (referred to as the “December quarter”); (c) 1st January to 31st March (referred to as the “March quarter”); and (d) 1st April to 30th June (referred to as the “June quarter”).” 14 Sub-section (4) substituted vide the Finance Act, 2009, the replaced text with its references read as follows: 14[(4) Êwhere the taxpayer is a company, the amount of advance tax due for a quarter shall be computed according to the following formula, namely:(A/4) - B Where – A is the tax assessed to the taxpayer for the latest tax year or latest assessment year under the repealed Ordinance; and B IS THE TAX PAID IN THE QUARTER FOR WHICH A TAX CREDIT IS ALLOWED UNDER SECTION 168, OTHER THAN TAX DEDUCTED UNDER SECTION 149 OR 155.] 2010 – 2011 127 The Income Tax Ordinance, 2001 (A x B/C) - D Where – A is the taxpayer’s turnover for the quarter; B is the tax assessed to the taxpayer for the latest tax year; C is the taxpayer’s turnover for the latest tax year; and D is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 155.] 2[(4A) Any taxpayer who is required to make payment of advance tax in accordance with sub-section (4), shall estimate the tax payable by him for the relevant tax year, at any time before the last installment is due. In case the tax payable is likely to be more than the amount he is required to pay under sub-section (4), the taxpayer shall furnish to the Commissioner an estimate of the amount of the tax payable by him and thereafter pay such amount after making adjustment for the amount (if any) already paid in terms of sub-section (4). 3[(4AA)] [4] 5[(4AA) Tax liability under section 113 shall also be taken into account while working out payment of advance tax liability under this section.] (4B) 6[Where the taxpayer is an individual [7] having latest assessed income of 8[five] hundred thousand rupees or more as determined under section (2), the amount of advance tax due for a quarter shall be computed according to the following formula, namely:“(A/4) – B Where A is the tax assessed to the taxpayer for the latest tax year or latest assessment year under the repealed Ordinance; and B is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 149 or 155.] (5) Advance tax is payable by 1[an individual [2]] to the Commissioner – 14 Substituted by the Finance Act, 2004. The substituted sub-section (4) read as follows: “(4) 6A[Where the taxpayer is a company or an association of persons, the amount] of advance tax due for a quarter shall be computed according to the following formula, namely:– (A x B/C) - D where – A is the taxpayer’s turnover for the quarter; B is the tax assessed to the taxpayer for the latest tax year 6B[or the latest assessment year under the repealed Income Tax Ordinance, 1979]; C is the taxpayer’s turnover for the latest tax year 6C[or the latest assessment year under the repealed Income Tax Ordinance, 1979]; and D is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 6D[155].” 6A Earlier the words “The amount” were substituted by the Finance Act, 2003. 6B Earlier inserted by the Finance Act, 2003. Before insertion by the Finance Act, 2003 this was inserted by S.R.O. 380(I)/2003, dated 03.05.2003 which stood rescinded by S.R.O. 608(I)/2003, dated 24.06.2003 with effect from 01.07.2003. 6C Earlier inserted by the Finance Act, 2003. Before insertion by the Finance Act, 2003 this was inserted by S.R.O. 380(I)/2003, dated 03.05.2003 which stood rescinded by S.R.O. 608(I)/2003, dated 24.06.2003 with effect from 01.07.2003. 6D Earlier the figure “149” was substituted by the Finance Act, 2003. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. ADVANCE TAX PAYABLE BY AOPs. [Section 147(4)] Section 147 did not provide a method for computation of advance tax payable by AOPs. An amendment in sub-section (4) has been made to extend the provision to AOPs as well which shall be paying advance tax in a manner as applicable to individuals. 1 Words inserted vide the Finance Act, 2010. 2 Sub-section (4A) renumbered as (4B) and sub-section (4A) inserted by the Finance Act, 2006. 3 Sub section (4AA) inserted by the Finance Act, 2007. 4 Sub-section 4AA omitted by the Finance Act, 2008, the omitted sub-section read as follows: Tax liability under section 113 shall also be taken into account while working out payment of advance tax liability under this section. 5 Sub-section (4AA) inserted vide the Finance Act, 2009. 6 Sub-section (4A) inserted by Finance Act, 2003 7 Words 7[or an association of persons] 7 as inserted by the Finance Act, 2005 omitted vide the Finance Act, 2010. 8 Substituted for “two” vide the Finance Act, 2010. 2010 – 2011 The Income Tax Ordinance, 2001 128 (a) in respect of the September quarter, on or 3[before] the 4[15th day of September]; (b) in respect of the December quarter, on or before the 5[15th day of December]; (c) in respect of the March quarter, on or before the 6[15th day of March]; and (d) in respect of the June quarter, on or before the 7[15th day of June]. 8[(5A) Advance tax shall be payable by an association of persons or a company to the Commissioner- (a) in respect of the September quarter, on or before the 25th day of September; (b) in respect of the December quarter, on or before the 25th day of December; (c) in respect of the March quarter, on or before the 25th day of March; and (d) in respect of the June quarter, on or before the 15th day of June.] 9[(5B) Adjustable advance tax on capital gain from sale of securities shall be chargeable as under, namely:- S. No. (1) 1. 2. Period. Rate of advance tax. (2) Where holding period of a security is less than six months. Where holding period of a security is more than six months but less than twelve months. (3) 2% of the capital gains derived during the quarter. 1.5% of the capital gains derived during the quarter: Provided that such advance tax shall be payable to the Commissioner within a period of seven days after the close of each quarter: Provided further that the provisions of this sub-section shall not be applicable to individual investors.] 10[(6) If any taxpayer who is required to make payment of advance tax under sub-section (1) estimates at any time before the last installment is due, that the tax payable by him for the relevant tax year is likely to be less than the amount he is required to pay under sub-section (1), the taxpayer may furnish to the Commissioner an estimate of the amount of the tax payable by him, and thereafter pay such estimated amount, as reduced by the amount, if any, already paid under sub-section (1), in equal installments on such dates as have not expired.] Substituted for “a taxpayer” vide the Finance Act, 2009. Words 2[or an association of persons] 2 as inserted by the Finance Act, 2009 omitted vide the Finance Act, 2010. 3 The word “by” substituted by the Finance Act, 2005. 4 Substituted for the figure and words “7th day of October” by the Finance Act, 2004. 5 Substituted for the figure and words “7th day of January” by the Finance Act, 2004. 6 Substituted for the figure and words “7th day of April” by the Finance Act, 2004. 7 Substituted for the figure and words “21st day of June” by the Finance Act, 2004. 8 Section (5A) substituted vide the Finance Act, 2010, the replaced text read as follows: 8[(5A) Advance tax is payable by a company to the Commissioner – (a) In respect of the September quarter, on or before the 15th day of October; (b) In respect of the December quarter, on or before the 15th day of January; (c) In respect of the March quarter, on or before the 15th day of April; and In respect of the June quarter, on or before the 15th day of June; and] 8 Sub-section (5A) inserted vide the Finance Act, 2009. 9 Section (5B) inserted vide the Finance Act, 2010. 10 Substituted by the Finance Act, 2004. The substituted sub-section (6) read as follows: “(6) The turnover of a taxpayer for the period from 16th to 30th June of the June quarter shall be taken to be equal to the turnover for the period from 1st to 15th June of that quarter.” 1 2 2010 – 2011 The Income Tax Ordinance, 2001 129 1[(6A) Notwithstanding anything contained in this section, where the taxpayer is a company or an association of persons, advance tax shall be payable by it in the absence of last assessed income or declared turnover also. The taxpayer shall estimate the amount of advance tax payable on the basis of quarterly turnover of the company or an association of persons, as the case may be, and thereafter pay such amount after,- (a) taking into account tax payable under section 113 as provided in sub-section (4AA); and (b) making adjustment for the amount (if any) already paid.] (7) The provisions of this Ordinance shall apply to any advance tax due under this section as if the amount due were tax due under an assessment order. (8) A taxpayer who has paid advance tax under this section for a tax year shall be allowed a tax credit for that tax in computing the tax due by the taxpayer on the taxable income of the taxpayer for that year. (9) A tax credit allowed for advance tax paid under this section shall be applied in accordance with sub-section (3) of section 4. (10) A tax credit or part of a tax credit allowed under this section for a tax year that is not able to be credited under sub-section (3) of section 4 for the year shall be refunded to the taxpayer in accordance with section 170. 2[ ] Division II Advance Tax Paid to a Collection Agent Ð Ô 148. Imports.- (1) The Collector of Customs shall collect advance tax from every importer of goods on the value of the goods at the rate specified in Part II of the First Schedule. Sub-section (6A) substituted vide the Finance Act, 2009, the replaced text read as follows: [(6A) Notwithstanding anything contained in this section, where the taxpayer is a company, advance tax shall be payable by it in the absence of last assessed income also. The taxpayer shall estimate the amount of advance tax payable on the basis of estimated quarterly accounting profit of the company and thereafter pay such amount after 1[making adjustment for the amount (if any) already paid.] [1] 1 Sub section (6A) inserted by the Finance Act, 2007. 1 Words inserted by the Finance Act, 2008. 1 Clauses (a) and (b) omitted by the Finance Act, 2008, the omitted clauses read as follows: (a) taking into account tax payable under section 113 as provided in sub-section (4AA); (b) making adjustment for the amount (if any) already paid. 2 Omitted by the Finance Act, 2004. The omitted sub-section (11) read as follows: “(11) In this section, “turnover” shall not include amounts referred to in clauses (a), (b), 1A[, (ba)] (c) and (d) of sub-section (1).” 1A Earlier the comma, brackets and letters inserted by the Finance Act, 2003. Before insertion by the Finance Act, 2003 this was inserted by S.R.O. 633(I)/2002, dated 14.09.2002 which stood rescinded by S.R.O. 608(I)/2003, dated 24.06.2003 with effect from 01.07.2003. INCOME TAX Circular No. 5 dated the the June 30, 2010 Through an amendment in the Income Tax Ordinance, 2001 brought about by the Finance Act, 2010, rate of Advance Tax under section 148 of the Income Tax Ordinance 2001 has been enhanced from 5%, as against previous rate of 4% for the imports of raw material by commercial importers. 2. The manufacturer / industrial undertakings importing raw materials for their self-use shall remain covered under clause (9) of PartII of Second Schedule to the Ordinance, and rate of deduction of advance tax deductible in their case, will remain 3%. 3. Exemptions from deduction of the advance tax as available under the existing provisions of Income Tax Ordinance, 2001, shall apply accordingly. 1 1 st 4. The amendments brought in through Finance Act, 2010 shall be effective from 1 July 2010 onwards. SECTION 148(I) SHALL NOT APPLY to the persons specified under SRO 947(I)/2008 dated the 5th September, 2008 which th superseded SRO.593(I)/91, dated the 30 June, 1991. >>> http://www.fbr.gov.pk/newdt/Sros/2008/2008sro947.pdf EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008RATIONALIZATION OF WITHHOLDING TAX RATES ON IMPORTS [Section 148]. Under the erstwhile provisions of section 148, withholding tax rate was 5% on imports. Tax so deducted was final tax in respect of commercial importers. However, withholding tax @ 1% on raw material and capital goods imported for own use, collected from manufacturers was adjustable, subject to the provisions of the Ordinance. The direct and indirect exporters covered under the DTRE scheme and manufacturer exporters could import goods without payment of withholding tax. There were consistent complaints of Ð 2010 – 2011 130 The Income Tax Ordinance, 2001 misuse of exemption certificate and low withholding tax rate for manufacturers who reportedly sell the imported goods in open market instead of their own use putting the commercial importers in a disadvantageous position. 15.2 The withholding tax regime has been reviewed as a whole and a uniform rate of 2% withholding tax has been provided for commercial as well as manufacturer importers, being final tax in the case of former and adjustable in the case of latter. It will not only curb the tendency of misuse of this facility by the manufacturer resulting in the loss of revenue but would also provide a level playing field to all the stakeholders. 15.3 For the convenience of the importers, relevant provisions of Part II, III and IV of the Second Schedule to the Ordinance are explained hereunder to state the changes brought about in the WHT regime for imports:15.3.1 Under clause (9) of Part II of the Second Schedule, tax under section 148 was payable @ 1% on the import of fibers, yarn and fabric, but, “pure cotton or its yarn or its fabrics” were exempt from this levy. To give equal treatment to various items in textile sector, tax at a uniform reduced rate of 1% shall also be collected on the aforesaid items i.e. pure cotton or its yarn or its fabrics, at import stage. 15.3.2 Under clause (13) of Part II of the Second Schedule, tax under section 148 was payable @ 1% on the import of capital goods and raw material imported exclusively for own use by a manufacturer registered with Sales Tax Department. The aforesaid clause has been omitted. Now the importer of capital goods and raw material even if imported for own use by a manufacturer shall be liable to WHT @ 2%. 15.3.3 Under clause (13A) of Part II of the Second Schedule, providing reduced rate of 1% on the import of phosphatic fertilizer has been omitted to collect WHT @ 2% at import stage. 15.3.4 Clause (13B) of Part II of the Second Schedule providing 2% levy on import of certain items has been omitted because it had become redundant as general rate on import has been fixed at 2% instead of 5%. 15.3.5 Under clause (13G) of Part II of the Second Schedule, tax payable @ 1% on the import of the items mentioned at subclauses (i) to (xxiv). The subclauses (i) to (iii) and (viii) to (xxiv) have been omitted. Tax @ 2% shall be collected on the items, falling under the aforesaid clauses (i) to (iii) and (viii) to (xxiv) instead of reduced rate. However, gold, mobile telephone sets and silver imported under sub-clauses (iv) to (vi) respectively shall continue to pay tax @ 1% of the import value. 15.3.6 Clause (13H) of Part II of the Second Schedule has been omitted because reduction in general rate on import from 5% to 2% has rendered this clause redundant. 15.3.7 Clause (56) of Part IV of the Second Schedule has been substituted. The provisions of section 148, regarding withholding tax on imports shall not apply to the following items:(i) the goods classified under Pakistan Customs Tariff falling under Chapters 27, 86 and 99. (ii) goods imported by direct and indirect exporters which are covered under sub-chapter 7 of Chapter XII of Pakistan Customs Laws read with SRO.450(I)/2001 dated June 18, 2001. (iii) goods temporarily imported into Pakistan for subsequent exportation are exempt from income tax which are exempt from customs duty and sales tax under SRO.1065 (I)/2005 dated October 20, 2005. EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. RATIONALIZATION OF WITHHOLDING TAX ON IMPORTS. [Section 148 - Parts II & IV of Second Schedule] Previously, advance income tax @ 6% of the value of goods was collected on import (except edible oil) which was; (i) adjustable in the case of manufacturer; and (ii) final tax liability for commercial importers. The salient features of amended withholding tax regime under section 148 are: (i) the standard rate of withholding tax on import has been reduced from 6% to 5% of the value of goods; (ii) sub-sections (3) and (4) relating to issuance of exemption certificates to manufacturer importers on the basis of payment of withholding tax or advance tax under section 147 during the year, have been omitted. Similarly, clauses (vi) and (ix) of SRO.593(I)/91 dated 30th June 1991 have also been omitted; (iii) the commissioner shall issue a reduced rate certificate to a person whose income is not subject to final taxation and is not likely to pay any tax (other than tax under section 113), allowing payment of tax collectable under this section at a reduced rate of 0.5% [section 148(4A)] (iv) the expression “value of goods” shall include Federal Excise Duty which shall be deemed to have always been included; (v) a uniform adjustable withholding tax @ 1% on import of capital goods and raw material imported exclusively for its own use, has been introduced for a manufacturer registered with sales tax department [clause (13), Part II]; (vi) manufacturer exporters registered with Sales Tax department will not be subject to WHT at import stage in respect of capital goods and raw material. For this purpose a new sub-clause (xxii) has been inserted in Part IV of the Second Schedule to the Income Tax Ordinance, 2001; (vii) tax collected from the manufacturers of motor vehicles on import of all types of motor vehicles (in CBU condition) shall not be treated as discharge of final tax liability [section 148(7)(c)]; (viii) on import of edible oils including crude oil imported as raw material for manufacturer of ghee or cooking oil the withholding tax rate has been reduced from 3% to 2% [clause (13H), Part II]; (ix) withholding tax has been reduced to 2% on import of following items: (a) energy saver lamps; (b) bitumen; (c) fixed wireless terminal; (d) pesticides and wedicides [clause (13H), Part II] (x) section 148(2) has been substituted empowering the Board to exempt any goods, class of goods or persons or class of persons from the applicability of section 148(1). Goods on which withholding tax under section 148 shall be collected at the rate of 1% of the import value, please see SRO 638(I)/2005 dt. 27th June, 2005 with other Circulars etc. at the ANNEXURE’S page no. 5 to 11. Ô Withholding Tax (WHT) on imports – See clarification of IT Cir. Dated the 27th June, 2006 at Annexure Ä Income Tax Cir. No. 1 dated the 1st July, 2006 EXEMPTION CERTIFICATE FOR IMPORTERS. [Section 148] Commissioner can issue a certificate for 100% reduction of advance tax/ WHT in the case of a manufacturer who imports raw material (other than edible oil) for his own use if the tax paid or collected in a tax year equals the amount of tax paid in the immediately preceding year. Amendment in section 148 (3) has been made to empower the Commissioner to issue exemption certificate to the extent of 75% reduction only. 2010 – 2011 131 The Income Tax Ordinance, 2001 1 [(2) Nothing contained in sub-section (1) shall apply to any goods or class of goods or persons or class of persons importing such goods or class of goods as may be specified by the Board.] 2[(3) (4)] 3[(4A) [4] (5) Advance tax shall be collected in the same manner and at the same time as the customs-duty payable in respect of the import or, if the goods are exempt from customs-duty, at the time customs-duty would be payable if the goods were dutiable. (6) The provisions of the Customs Act, 1969 (IV of 1969), in so far as relevant, shall apply to the collection of tax under this section. 5 Â[(7) The tax collected under this section shall be a final tax 1[except as provided under sub-section (8)] on the income of the importer arising from the imports subject to sub-section (1) and this sub-section shall not apply in the case of import of— Furthermore, an explanation has been added to explain the expression “edible oils” to include crude oil, imported as raw material for manufacture of ghee or cooking oil. 1 Sub section (2) substituted by the Finance Act, 2007, the old sub section read as follows: (2) This section shall not apply to – (a) the re-importation of re-usable containers for re-export qualifying for customs-duty and sales tax exemption on temporary import under the Customs Notification No. S.R.O. 344(1)/95, dated the 25th day of April, 1995; or (b) the importation of the following petroleum products – “Motor Spirit (MS), Furnace Oil (FO), JP-1 and MTBE”. 1 Sub section (2) substituted by the Finance Act, 2007, the old sub section read as follows: (2) This section shall not apply to – (a) the re-importation of re-usable containers for re-export qualifying for customs-duty and sales tax exemption on temporary import under the Customs Notification No. S.R.O. 344(1)/95, dated the 25th day of April, 1995; or (b) the importation of the following petroleum products – “Motor Spirit (MS), Furnace Oil (FO), JP-1 and MTBE”. 2 Sub sections (3) and (4) omitted by the Finance Act, 2007, the omitted sub sections read as follows: (3) Where a manufacturer imports raw materials (other than edible oils) exclusively for the manufacturer’s own use, the Commissioner may certify a reduction (of up to 1[seventy five] per cent) of the rate of advance tax applicable under this section if the aggregate of tax paid or collected in a tax year equals the amount of tax paid by the manufacturer in the immediately preceding year. 2[(4) Notwithstanding the provisions of sub-section (3), a person being a manufacturer who is liable to pay advance tax under section 147, imports raw materials (other than edible oils) exclusively for his, or as the case may be, its own use, the Commissioner shall upon application in writing by such person, issue an exemption certificate effective from the date on which the certificate is issued to the 30th day of June next falling. Provided that where the person to whom an exemption certificate has been issued fails to pay any installment due, the Commissioner may cancel the certificate.] 1 Substituted for “one hundred” by the Finance Act, 2006. 2 Substituted for “(4) A certification of a reduction of tax under sub-section (3) shall not be made in the first year of a manufacturer’s business.” By Finance Act, 2003 3 Sub section (4A) substituted by the Finance Act, 2007, the old sub section read as follows: 3[(4A) Where, in the case of a person being a manufacturer importing raw materials (other than edible oils) exclusively for his or, as the case may be, its own use, the Commissioner is satisfied that the income of the person during the tax year is exempt from tax or such person is not likely to pay any tax (other than tax under section 113) on account of depreciation 3[ ] or brought forward loss, the Commissioner shall, upon application in writing made by such person, issue the person certificate of exemption from the tax collectible under section 148] 3[.] 3 Sub-section (4A) inserted by Finance Act, 2003 3 The word “allowance” omitted by the Finance Act, 2004. 3 Inserted by the Finance Act, 2005. 4 4[(4A) Where, in the case of a person whose income is not subject to final taxation, the Commissioner is satisfied that such person is not likely to pay any tax (other than tax under section 113), the Commissioner shall, upon application in writing made by such person, issue certificate allowing payment of tax collectable under this section at a reduced rate of 0.5%.] Sub section (4A) substituted by the Finance Act, 2007, the old sub section read as follows: [(4A) Where, in the case of a person being a manufacturer importing raw materials (other than edible oils) exclusively for his or, as the case may be, its own use, the Commissioner is satisfied that the income of the person during the tax year is exempt from tax or such person is not likely to pay any tax (other than tax under section 113) on account of depreciation 4[ ] or brought forward loss, the Commissioner shall, upon application in writing made by such person, issue the person certificate of exemption from the tax collectible under section 148] 4[.] 4 Sub-section (4A) inserted by Finance Act, 2003 4 The word “allowance” omitted by the Finance Act, 2004. 4 Inserted by the Finance Act, 2005. 5 Sub-section (7) substituted by the Finance Act, 2006. The old sub-section read as follows: 4 4 2010 – 2011 132 The Income Tax Ordinance, 2001 (a) raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use; (b) fertilizer by manufacturer of fertilizer; and (c) 2[motor 4[(d) Ó large vehicles] in CBU condition by manufacturer of 3 [motor vehicles].] import houses, who,— (7) Except in the case of an industrial undertaking importing goods as raw materials 5[plant, machinery and equipment] for its own use, the tax collected under this section shall be a final tax on the income of the importer arising from the imports subject to subsection (1). Â EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009WITHHOLDING TAX ON IMPORTS. [Section 148(7), (8) – Part-II of First Schedule – Clause (9A) of Second Schedule] 32.1 As per subclause (i) and (iii) of clause (d) of subsection (7) of section 148, large import houses having paid-up capital of more than 100m and total assets exceeding Rs. 100m are excluded from treating tax collected on imports as final tax. As per Finance Act, 2009, the limit of paid-up capital and total assets have been enhanced to Rs. 250m and 350m respectively. 32.2 Previously the tax collected from a person on the import of edible oil for a tax year was to be treated as final tax under subsection (8) of section 148. By virtue of amendment made through Finance Act, 2009, the tax so collected shall be treated as minimum tax. However, the tax collected on import of packing material by the manufacturer of edible oil shall also be treated as minimum tax meaning thereby that from tax year 2010 and onwards manufacturer of ghee and edible oil shall file return u/s 114 instead of filing statement u/s 115. 32.3 Previously a general rate of 2% was applicable on imports. Now the same has been raised to 4% on the value of goods imported. Further a new sub-clause (9A) has been added to Part-III of the Second Schedule wherein tax under section 148 shall be collected @ 3% on import value of raw material imported by an industrial undertaking for its own use. Example-I 1 Gross value of imports (edible oil etc and packing material) under sub section (8) of section Rs. 100 148.(imported for own use) million 2 Tax collected under sub section (1) of section 148, @ 3% as provided in clause (9A) of Part II of Rs. 3 million the Second Schedule 3 Income as per return field under section 114 Rs. 10 million 4 Tax payable under Division II Part I of first Schedule @ 35% on the aforesaid income Rs. 3.5 million 5 The taxpayer would be required to pay further tax Rs. 0.5 million Example-II 1 Gross value of imports (edible oil etc and packing material) under sub section (8) of section Rs. 100 148.(imported for own use) million 2 Tax collected under sub section (1) of section 148, @ 3% as provided in clause (9A) of Part II of the Rs. 3 million Second Schedule 3 Loss as per return field under section 114 (Rs. 10 million) 4 Tax payable under Division II Part I of first Schedule @ 35% on the aforesaid income NIL 5 The tax collected under sub section (1) read with sub section (8) of section 148 would be Rs. 3 million ‘minimum tax’ Income Tax Cir. No. 1 dated the 1st July, 2006 ADJUSTABLE WITHHOLDING TAX ON IMPORT OF MOTOR CARS AND FERTILIZER BY MANUFACTURERS. [Section 148(7)] Under the existing regime, withholding tax is collected @ 6% at the time of import in case of commercial importers and tax withheld is the final tax under the presumptive tax regime. Manufacturers of cars and fertilizers are also importing cars and fertilizers as finished goods and marketing them in the country. Since these are considered as commercial imports being imported finished goods, tax withheld is not adjustable and is their final tax liability. Amendment is introduced to prescribe that tax withheld on import of cars in CBU condition and fertilizers in the case of manufacturers of cars and fertilizers will be adjustable against the final tax liability of such manufacturers. 1 Words inserted vide the Finance Act, 2010 2 Substituted for “car” by the Finance Act, 2007. 3 Substituted for “car” by the Finance Act, 2007. 4 Clause (d) inserted by the Finance Act, 2007. Ó EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. WITHHOLDING TAX IN CASE OF BULK IMPORTERS OF INDUSTRIAL RAW MATERIAL. [Section 148(7)(d) – Clause (57A) of Part IV of the 2nd Schedule] A new clause (d) has been inserted in section 148(7), in pursuant to which importer companies of bulk industrial raw material shall fall out side the ambit of PTR, provided the following conditions are fulfilled: (i) paid up capital = exceeds Rs.100 (M) (ii) imports during a tax year = exceed Rs.500 (M) (iii) owns assets at the close of the tax year = exceed Rs.100 (M) (iv) formed as single object company; (v) maintain computerized record of imports and sale of goods; (vi) issue 100% cash receipts on sales; (vii) company is registered with sales tax department; 2010 – 2011 133 The Income Tax Ordinance, 2001 (i) have paid-up capital of exceeding Rs.1[250] million; (ii) have imports exceeding Rs.500 million during the tax year; (iii) own total assets exceeding Rs.2[350] million at the close of the tax year; (iv) is single object company; (v) maintain computerized records of imports and sale of goods; (vi) maintain a system for issuance of 100% cash receipts on sales; (vii) present accounts for tax audit every year; (viii) is registered with Sales Tax Department; and (ix) make sales of industrial raw material of manufacturer registered for sales tax purposes.] 3[(8) The tax collected from a person under this section on the import of edible oil 4[and packing material] for a tax year shall be 5[minimum] tax.] (9) In this section – “Collector of Customs” means the person appointed as Collector of Customs under section 3 of the Customs Act, 1969 (IV of 1969), and includes a Deputy Collector of Customs, an Additional Collector of Customs, or an officer of customs appointed as such under the aforesaid section; 6[ ] 7[ á “value of goods” means the value of the goods as determined under the Customs Act, 1969 (IV of 1969), as if the goods were subject to ad valorem duty increased by the customs-duty, federal excise duty and sales tax, if any, payable in respect of the import of the goods.] 8[Explanation.— For the purpose of this section the expression “edible oils” includes crude oil, imported as raw material for manufacture of ghee or cooking oil.] 9[ ] (viii) make sales of industrial raw material to manufacturer(s) registered with sales tax department; and (ix) present accounts for tax audit every year. Further, newly inserted clause (57A) in Part IV of the Second Schedule provides that such importers will; (i) be exempt from withholding tax under section 153 on “sale of goods”; and (ii) not be “prescribed persons” as envisaged in section 153(9) 1 Substituted for “100” vide the Finance Act, 2009. 2 Substituted for “100” vide the Finance Act, 2009. 3 Substituted by the Finance Act, 2004. The substituted sub-section (8) read as follows: “(8) The tax collected from a person under this section on the import of edible oils for a tax year shall be treated as the minimum amount of tax payable by the person under this Ordinance and where the person’s final tax liability exceeds the amount collected under this section the tax collected shall be credited against that final liability.” 4 Words inserted vide the Finance Act, 2009. 5 Substituted for “final” vide the Finance Act, 2009. 6 The word “and” omitted by the Finance Act, 2004. 7 Expression substituted by the Finance Act, 2007, the old expression read as follows: “value of goods” means the value of the goods as determined under section 25 of the Customs Act, 1969 (IV of 1969), as if the goods were subject to ad valorem duty increased by the customs-duty and sales tax, if any, payable in respect of the import of the goods7[; and] 7 Substituted for full stop by the Finance Act, 2004. á THIS EXPRESSION SHALL BE DEEMED ALWAYS TO HAVE BEEN SO SUBSTITUTED AND SHALL HAVE EFFECT ACCORDINGLY under the Finance Act, 2007. 8 Explanation added by the Finance Act, 2006. 9 Omitted by the Finance Act, 2005. The definition of “industrial undertaking” read as follows: “A[“Industrial undertaking” means an undertaking which is set up or commenced in Pakistan on or after the 14th day of August, 1947, and which employs (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency; or (ii) twenty or more persons in Pakistan and 2010 – 2011 134 The Income Tax Ordinance, 2001 Division III Deduction of Tax at Source 149. Salary.- (1) (Every employer paying salary to an employee shall, at the time of payment, deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made after making [adjustment of tax withheld from employee under other heads and tax credit admissible under sections 61, 62, 63 and 64 during the tax year after obtaining documentary evidence], as may be necessary, for [:] [(i) (ii) (iii) tax withheld from the employee under this Ordinance during the tax year; any excess deduction or deficiency arising out of any previous deduction; or failure to make deduction during the year;] (2) The average rate of tax of an employee for a tax year for the purposes of sub-section (1) shall be computed in accordance with the following formula, namely:– A/B where – A is the tax that would be payable if the amount referred to in component B of the formula were the employee’s taxable income for that year; and B is the employee’s estimated income under the head “Salary” for that year. 150. Dividends.- Every 4[person] paying a dividend shall deduct tax from the gross amount of the dividend paid 5[ ] at the rate specified in Division III of Part I of the First Schedule. does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency and which is – (i) engaged in – (a) the manufacture of goods or materials or the subjection of goods or materials to any process, which substantially changes their original condition; (b) ship-building; (c) generation, transformation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or (d) the working of any mine, oil-well or any other source of mineral deposits not being an undertaking to which the Fifth Schedule applies; or (ii) any other industrial undertaking which may be approved by the Central Board of Revenue for the purposes of this clause.] A Added by the Finance Act, 2004. Ô EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. ADJUSTMENT OF TAX CREDIT AND WHT BY EMPLOYERS. [Section 149] Previously, employers while making deduction of tax, from salary paid to employees were authorized to adjust withholding tax collected on telephone subscription and private motor cars only. Amendment has been made in section 149, empowering the employer to; (i) adjust tax withheld under other heads; and (ii) allow tax credits available to an employee on – (a) donations to approved NPOs (section 61); (b) investment in shares (section 62); (c) contribution to approved pension funds (section 63); and (d) profit on debt (section 64). The employers shall, however, be responsible to obtain documentary evidence and for correct application of relevant provisions of law. This amendment will be effective from the tax year 2008 and onward. 1 Substituted for “such adjustment” by the Finance Act, 2007. 2 Colon inserted by the Finance Act, 2007. 3 Substituted for “any excess deduction or deficiency arising out of any previous deduction or failure to make a deduction during the year” by the Finance Act, 2007. 4 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TAX DEDUCTION BY NON-RESIDENT COMPANIES FROM DIVIDENDS [Section 150] Previously only resident companies were required to deduct tax at the time of making payment of dividends. By virtue of amendment in section 150, now a non-resident company will also be required to deduct tax from the gross amount of dividend paid, since remittance of after-tax profits of a branch of a non-resident company is also treated as dividend. Substituted for “resident company” vide the Finance Act, 2009. 5 The words “or collect tax from the shareholder in the case of bonus shares,” omitted by the Finance Ordinance, 2002. 2010 – 2011 135 The Income Tax Ordinance, 2001 151. Profit on debt.- (1) Where – 1[(a) a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account;] (b) a banking company 2[or] financial institution pays any profit on a debt, being an account or deposit maintained with the company or institution; 3[ ] 4[(c) the Federal Government, a Provincial Government or a 5[Local Government] pays to any person person 6[ ]profit on any security 7[other than that referred to in clause (a)] issued by such Government or authority; or] 8[(d) a banking company, a financial institution, a company referred to in 9[sub-clauses (i) and (ii) of clause (b)] of sub-section (2) of section 80, or a finance society pays any profit on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) to any person other than financial institution.] the payer of the profit shall deduct tax at the rate specified in Division I of Part III of the First Schedule from the gross amount of the yield or profit paid as reduced by the amount of Zakat, if any, paid by the recipient under the Zakat and Ushr Ordinance, 1980 (XVII of 1980), at the time the profit is paid to the recipient. (2) This section shall not apply to any profit on debt that is subject to sub-section (2) of section 152. 10[(3) Tax deducted under this section shall be a final tax on the profit on debt arising to a tax payer other a company from transactions referred to in clauses (a), (b) and (d) of sub-section (1).] Ä 152. Payments to non-residents.- (1) Every person paying an amount of 11[royalty] or fees for technical services to a non-resident person that is chargeable to tax under section 6 shall deduct tax from the gross amount paid at the rate specified in Division IV of Part I of the First Schedule. 1[(1A) Every person making a payment in full or part (including a payment by way of advance) to a non-resident person on the execution of— 1 Substituted for “(a) a person pays yield on a National Savings Deposit Certificate, including a Defence Savings Certificate, under the National Savings Scheme;” by Finance Act, 2003 2 Substituted for “and” by Finance Act, 2003 3 The word “or” omitted by the Finance Ordinance, 2002. 4 Substituted by the Finance Ordinance, 2002. The original clause (c0 read as follows: “(c) the Federal Government, a Provincial Government, a local authority, banking company, financial institution, company referred to in clauses (a) and (b) of the definition of “company” in sub-section (2) of section 80, or finance society pays any profit on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) to any person other than a financial institution, “ 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 Words “, other than a financial institution,” omitted by Finance Act, 2003 7 Inserted by Finance Act, 2003 8 Added by the Finance Ordinance, 2002. 9 Substituted for “clauses (a) and (b)” by Finance Act, 2003 10 Subs-section (3) added by the Finance Act, 2006. Ä Income Tax Cir. No. 1 dated the 1st July, 2006 RATIONALIZATION OF WITHHOLDING TAX ON SERVICES. [Section 152] Every prescribed person making a payment for rendering or providing of services is liable to deduct tax from the gross amount payable at the following rates:(i) in the case of transport services = 2% (ii) in any other case = 5%. The rate of WHT is prescribed @ 6% in the case of a contract – (i) for the supply of supervisory activities in relation to project; or (ii) for services rendered other than contract; and (iii) for advertisement services rendered by TV Satellite Channels. For the purposes of simplification of law and procedure and to reduce the hassle of litigation, uniformity has been introduced and services rendered or provided including transport services has also been subjected to a WHT @ 6% on the analogy of WHT rate on contracts, which shall also be the final discharge of liability under PTR. However, companies providing or rendering services will remain outside the ambit of PTR. As a result clause (iv) of SRO.600(I)/91 being contrary to the amended provision of law, is omitted from the said SRO. 11 Substituted for the word “royalties” by the Finance Ordinance, 2002. 2010 – 2011 136 The Income Tax Ordinance, 2001 (a) a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project; or (b) any other contract for construction or services rendered relating thereto; or (c) a contract for advertisement services rendered by T.V. Satellite Channels, Shall deduct tax from the gross amount payable under the contract at the rate specified in Division II of Part III of the First Schedule. 2[*(1AA). Every person making a payment of insurance premium or re-insurance premium to a nonresident person shall deduct tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule;] (1B) The tax deducted under sub-section (1A) shall be a final tax on the income of a nonresident person arising from a contract.] [(1BB). The tax deducted under sub-section (1AA) shall be a final tax on the income of the nonresident person arising out of such payment.] 3 (2) Subject to sub-section (3), every person paying an amount to a non-resident person (other than an amount to which sub-section (1) 4[or sub-section (1A)]5[1AA] applies) shall deduct tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule. (3) Sub-section (2) does not apply to an amount – (a) that is subject to deduction of tax under section 149, 150, 153, 155 6[,] 156 7[or 233]; (b) with the written approval of the Commissioner, that is taxable to a permanent establishment in Pakistan of the non-resident person; (c) that is payable by a person who is liable to pay tax on the amount as representative of the non-resident person under sub-section (3) of section 172; or (d) where the non-resident person is not chargeable to tax in respect of the amount. (4) Where a person claims to be a representative of a non-resident person for the purposes of clause (c) of sub-section (3), the person shall file a declaration to that effect with the Commissioner prior to making any payment to the non-resident person. 8(5) Where a person intends to make a payment to a non-resident person without deduction of tax under this section, 1[other than payments liable to reduced rate under relevant agreement for avoidance of Sub-sections (1A) & (1B) inserted by the Finance Act, 2006. Sub-section (1AA) inserted by the Finance Act, 2008. * EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008WITHHOLDING TAX ON INSURANCE AND REINSURANCE PREMIUM PAID TO OVERSEAS COMPANIES. [Section 152(1AA)]. Reinsurance premium paid to overseas companies was Rs.10.157 billion in the year 2007. Premium of life and goods insurance from Pakistan is being remitted to overseas insurance companies operating from abroad but this part of their Pakistan source income is not subjected to tax. Commission paid to non insurance companies is, however, subjected to withholding tax. 16.2 After this amendment, insurance and reinsurance premium paid to overseas insurance companies would now be subjected to 5% withholding tax at the time of remittance by invoking provision of sub-section (1AA) of section 152 of the Ordinance. The Fourth Schedule and section 169 of the Ordinance have accordingly been amended, to make this charge a final tax. 3 Sub-section (1BB) inserted by the Finance Act, 2008. 4 Inserted by the Finance Act, 2007. 5 Words inserted vide the Finance Act, 2010 6 Comma substituted for the word “or” by the Finance Act, 2006. 7 Word & figure inserted by the Finance Act, 2006. 8 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008WITHHOLDING TAX ON PAYMENTS TO NON-RESIDENTS COVERED BY AVOIDANCE OF DOUBLE TAXATION TREATY. 1 2 2010 – 2011 137 The Income Tax Ordinance, 2001 double taxation,] the person shall, before making the payment, furnish to the Commissioner a notice in writing setting out – (a) the name and address of the non-resident person; and (b) the nature and amount of the payment. 2[(5A) The Commissioner on receipt of notice shall3[, within thirty days,] pass an order accepting the contention or making the order under sub-section (6).] (6) Where a person has notified the Commissioner of a payment under sub-section (5) and the Commissioner has reasonable grounds to believe that the non-resident person is chargeable to tax under this Ordinance in respect of the payment, the Commissioner may, by 4[order] in writing, direct the person making the payment to deduct tax from the payment in accordance with sub-section (2). 5(7) Sub-section (5) shall not apply to a payment on account of – (a) an import of goods where title to the goods passes outside Pakistan 6[and is supported by import documents], except an [7] import that is part of an overall arrangement for the supply of goods, their installation, and any commission and guarantees in respect of the supply where – (i) the supply is made by the head office outside Pakistan of a person to a permanent establishment of the person in Pakistan; (ii) the supply is made by a permanent establishment of the person outside Pakistan to a permanent establishment of the person in Pakistan; (iii) the supply is made between associates; or (iv) the supply is made by a resident person or a Pakistan permanent establishment of a non-resident person; or (b) educational and medical expenses remitted in accordance with the regulations of the State Bank of Pakistan. [Section 152(5)]. Before the amendment of sub-section (5) of section 152 of the Ordinance, any person making payment to a non-resident person without deduction of tax, was required to give, complete particulars of the non-resident as well as nature and amount of the payment, to the Commissioner, for allowing him to make payments without deduction of the tax. Such exercise, however was, futile where Avoidance of Double Taxation Agreements provide exemption or a reduced rate of tax for a particular payment. 17.2 The said provisions have been amended. Now these would not be applicable where payments are subjected to “nil” or “reduced tax rate” as per the provisions in the Avoidance of Double Taxation Treaty. This measure would reduce the unnecessary hassle of the taxpayers of getting exemption certificate for remittance of such amounts with deduction of tax or deduction as per the provision of the treaty. 1 Words inserted by the Finance Act, 2008. 2 Sub-section (5A) inserted by Finance Act, 2003 3 Inserted by the Finance Act, 2004. 4 Substituted for the word “notice” by the Finance Act, 2004. 5 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008FURNISHING OF IMPORT DOCUMENTS AT THE TIME OF REMITTING AMOUNT FOR IMPORTS - [Section 152(7)]. Under sub-section (7) of section 152, an import of goods where title to the goods passes outside Pakistan was not required to be backed by any import document etc. Through this amendment, it has been made mandatory, to provide import documents to the banker for remitting the amount exclusively against imports. The other conditions would remain unchanged. 6 Words inserted by the Finance Act, 2008. 7 The word “the” omitted by the Finance Ordinance, 2002. 2010 – 2011 138 The Income Tax Ordinance, 2001 Ð 153. Payments for goods and services.- (1) Every prescribed person making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person (a) for the sale of goods; 1(b) for the rendering of 1[or providing of] 2[ ] services; Ð INCOME TAX Circular No. 10 dated the the July 16, 2010 INDIVIDUAL WITH TURNOVR RS.50 MILLION AND ABOVE TO ACT AS A WITHHOLDING AGENT [Section 153]. Through an amendment in sub-section (9) of section 153 of the Income Tax Ordinance, 2001, an individual taxpayer with annual turnover of Rs.50 million or above in the tax year 2009 or any subsequent tax year, has also been designated as “prescribed person”. Now an individual taxpayer with turnover of Rs. 50 million or above shall also be required to act as withholding agent responsible to withhold advance tax under the various provisions of income tax law. SECTIONS 3 TO 5 & 9 OF IT CIRCULAR DATED THE 27TH JUNE, 2006. RATIONALIZATION OF WITHHOLDING TAX ON SERVICES. [Section 152] Every prescribed person making a payment for rendering or providing of services is liable to deduct tax from the gross amount payable at the following rates:(iii) in the case of transport services= 2% (iv) in any other case = 5%. The rate of WHT is prescribed @ 6% in the case of a contract – (iv) for the supply of supervisory activities in relation to project; or (v) for services rendered other than contract; and (vi) for advertisement services rendered by TV Satellite Channels. Uniformity has been introduced in rate now and services rendered or provided including transport services has also been subjected to WHT @ 6% on the analogy of WHT rate on contracts, which shall also be the final discharge of liability under PTR. However, companies providing or rendering services will remain outside the ambit of PTR. Clause (iv) of SRO.600(I)/91 has been omitted. CLAUSE (I) & (IV) OF SRO 600(1)/1991 DATED THE 2ND JULY, 1991 WHICH HAS BEEN OMITTED BY THE FINANCE ACT, 2006 IS REPRODUCED AS UNDER: Payments Rates (i) Payments on account of supply of raw hides and skin One per cent (iv) Payments on account of transportation of goods Two through goods transport vehicle. per cent WITHDRAWAL OF 1% WITHHOLDING TAX ON SUPPLIES OF RAW HIDES AND SKINS Withholding tax at reduced rate of 1% was prescribed on supplies of raw hides and skin. SRO.600(I)/91 dated July 2, 1991 prescribed persons (being exporters of goods) making payments on account of supply of goods as are purchased in respect of goods exported outside Pakistan, are not required to withhold tax on supplies. However, where special rates of tax deduction have been specified, as in the case of raw hides & skins, the prescribed person has to deduct tax at source under the law. THE SPECIAL RATE FOR DEDUCTION OF TAX, ON SUPPLIES OF RAW HIDES AND SKINS AS PROVIDED IN CLAUSE (I) OF SRO.600(I)/91 DATED JULY 2, 1991 HAS BEEN WITHDRAWN, W.E.F. JULY 1, 2006 SO THAT ALL SUPPLIERS MAKING SUPPLIES TO EXPORTERS GET SAME TREATMENT. SERVICES OF SIZING AND WEAVING TO BE DEEMED AS EXPORTS. [SECTION 153 (1A)] Services of stitching, dying, printing, embroidery and washing rendered or provided to an exporter or an export house was treated as export and chargeable to tax at the rate equal to the rate of tax applicable to the exporter on export of goods to which such services relate as specified in Division IV of Part III of the First Schedule *[SRO.946(I)/2005 dated September 12, 2005]. This measure was taken in conformity with the parameters given in the Trade Policy 2005. Sizing and weaving have also bee treated as export and export rate shall be applicable to such services under Presumptive Tax Regime. * Available at 2nd Schedule of part II in clause (25). Amendment in law has been made to specify exporter or export house as “prescribed person” for the purposes of WHT on such services. ENHANCING WHT RATE – WHERE NTN/CNIC IS NOT DISCLOSED. [Section 153(8A)] A new provision has been incorporated to provide that where supplier of goods and services as well as a person executing a contract does not disclose NTN/CNIC, WHT will be enhanced by 2% over and above the normal rate of withholding tax. EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. WITHDRAWAL OF OPTION TO MANUFACTURERS CUM SUPPLIERS. [Section 153] Under clause (40) of Part IV of the Second Schedule, manufacturers of goods (other than those for whom special rates of deduction have been specified) could exercise the choice to opt for PTR in respect of payments on account of supply of goods manufactured by them from which tax was deductible under section 153. It was observed that the manufacturers were invariably opting for PTR only when the final tax liability under the PTR worked out to a lesser figure as compared to the tax liability which would be payable if they were taxed under the normal tax regime on their taxable profits. This misuse of concession was considered undesirable especially in the case of some fully documented large corporates which were not paying taxes in accordance with their book profits. Accordingly clause (40) has been omitted with retrospective effect. At the same time a new sub-section (6A) has been inserted in section 153, also with retrospective effect, so that the option available to manufacturers-cumsuppliers stands withdrawn retrospectively. It has also been provided that any past decisions/judgments of a court or a tribunal or an income tax authority shall not have any effect whatsoever. The intent is to forestall any future leakage of revenues and also to retrieve the revenue already lost. The option already filed by the taxpayers shall stand automatically rescinded. 1 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009PAYMENTS FOR GOODS AND SERVICES. [Section 153] 2010 – 2011 139 The Income Tax Ordinance, 2001 (c) *on the execution of a contract, other than a contract for the 3[sale] of goods or the rendering of 4[or providing of] 5[ ]services, shall, at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division III of Part III of the First Schedule. Ò 1 [(1A) Every exporter or an export house making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person for As a result of amendment made in sub-section (6), tax deducted on payments made for rendering or providing of services will be considered as minimum tax and henceforth all the taxpayers falling in the ambit of section 153(1) (b) shall file return under the normal tax regime instead of statement under final tax regime. Sub-section (9) has also been amended to include a non-profit organization in the list of prescribed persons who are required to withhold tax at the time of making payments for sale of goods, rendering of services or contract. Persons engaged in packing and re-packing have been excluded from the definition of “manufacturer” for the purposes of section 153. As such in view of appellate decision, persons engaged in packing and re-packing will be subject to final taxation. Example-I 1 Gross amount receivable on account of rendering or providing of services under clause (b) of sub Rs. section (1) of section 153 300,000 2 Tax collected under sub section (1) of section 153, @ 6% as per provision of Division III Part III of the Rs. First Schedule 18,000 3 Income as per return field under section 114 Rs. 200,000 4 Tax payable under Division I of Part I of First Schedule @ 4% on the aforesaid income Rs. 8,000 5 The taxpayer would be required to pay tax Rs. 18,000 Example-II 1 Gross amount receivable on account of rendering or providing of services under clause (b) of sub Rs. section (1) of section 153 300,000 2 3 Tax collected under sub section (1) of section 153, @ 6% as per provision of Division III Part III of the First Schedule Income as per return field under section 114 4 Tax payable under Division II of Part I of First Schedule @ 35% on the aforesaid income 5 The taxpayer would be required to pay further tax 1 Example-III Gross amount receivable on account of rendering or providing of services under clause (b) of sub section (1) of section 153 2 3 Tax collected under sub section (1) of section 153, @ 6% as per provision of Division III Part III of the First Schedule Loss as per return field under section 114 4 Tax payable under Division II of Part I of First Schedule @ 35% on the aforesaid income 5 The taxpayer would be required to pay tax Rs. 18,000 Rs. 100,000 Rs. 35,000 Rs. 17,000 Rs. 300,000 Rs. 18,000 Rs. 50,000) NIL Rs. 18,000 Inserted by the Finance Act, 2005. The word “professional” omitted by the Finance Ordinance, 2002. * EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. [Sections 153(1)(b) and 153(1)(c)] Under section 153, withholding tax on payments to a resident persons or a permanent establishment in Pakistan of a non-resident person, for the rendering of services is adjustable. However similar payments or on the execution of contract attract a withholding tax which is the final tax on the income from such transactions. Prior to 2002, this provision applied to “professional services” only. The term “professional services” was defined to include the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee. However with the omission of the word “professional” from the law in 2002, an erroneous impression was created that the meanings of the term “services” had been restricted. In order to dispel this impression, a clarificatory amendment has been made and in sections 153(1)(b) and 153(1)(c) the words “or providing of” have been inserted. The effect of this amendment shall be to make withholding tax on all types of services adjustable. 3 Substituted for “supply” by Finance Act, 2003 4 Inserted by the Finance Act, 2005. 5 Word “professional” omitted by Finance Act, 2003 Ò INCOME TAX CIR. NO. 1 DATED THE 1ST JULY, 2006 1 2 SERVICES OF SIZING AND WEAVING TO BE DEEMED AS EXPORTS. [SECTION 153 (1A)] Through *[SRO.946(I)/2005 dated September 12, 2005] services of stitching, dying, printing, embroidery and washing rendered or provided to an exporter or an export house were treated as export and made chargeable to tax at the rate equal to the rate of tax 2010 – 2011 140 The Income Tax Ordinance, 2001 the rendering of or providing of services of stitching, dying, printing, embroidery, washing, sizing and weaving, shall at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division IV of Part III of the First Schedule.] (2) The gross amount payable for a sale of goods shall include the sales tax, if any, payable in respect of the sale. 2[(3)] (4) The Commissioner may, on application made by the recipient of a payment referred to in subsection (1) [3] and after making such enquiry as the Commissioner thinks fit, allow, by order in writing, any person to make the payment without deduction of tax. (5) Sub-section (1) shall not apply to – (a) a sale of goods where – (i) the sale is made by the importer of the goods; (ii) the importer has paid tax under section 148 in respect of the goods; and (iii) the goods are sold in the same condition they were in when imported; (b) a refund of any security deposit; 4[(ba) a payment made by the Federal Government, a Provincial Government or a 5[Local Government] to a contractor for construction materials supplied to the contractor by the said Government or the authority;] 6[(bb) Ða cotton ginner who deposits in the Government Treasury, an amount equal to the amount of tax deductible on the payment being made to him, and evidence to this effect is provided to the “prescribed person;] applicable to the exporter on export of goods to which such services related, as specified in Division IV of Part III of the First Schedule. This measure was taken in conformity with the parameters given in the Trade Policy 2005. Since sizing and weaving industry both are also providing similar services to the exporters, therefore, to incentivize the export sector, these services have also been treated as export and export rate shall be made applicable to such services under Presumptive Tax Regime. * Available at 2nd Schedule of part II in clause (25). Amendment in law has been made to specify exporters or export houses as “prescribed persons” for the purposes of WHT on such services. 1 Sub-section (1A) inserted by the Finance Act, 2006. SEE EXPLANATION AT PREVIOUS PAGE. 2 Sub-section (3) omitted by the Finance Act, 2006. The omitted sub-section read as follows: (3) Every prescribed person making a payment in full or part (including a payment by way of advance) to a non-resident person on the execution of – 2[ a ] 2[ b ] (c) a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project; or (d) any other contract for construction or services rendered, other than a contract to which section 152 applies, 2[or] 2[(e) a contract for advertisement services rendered by T.V. Satellite Channels,] shall deduct tax from the gross amount payable under the contract at the rate specified in Division III of Part III of the First Schedule. 2 Omitted by the Finance Act, 2005. The omitted clause (a) read as follows: “(a) a turnkey contract;” 2 Omitted by the Finance Act, 2005. The omitted clause (b) read as follows: “(b) a contract or sub-contract for the design, construction or supply of plant and equipment under power project;” 2 Inserted by the Finance Act, 2004. 2 Added by the Finance Act, 2004. 3 Word, brackets and figure “or (3)” omitted by the Finance Act, 2007. 4 Inserted by Finance Act, 2003 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 Sub Clause (bb) inserted by the Finance Act, 2007. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. PAYMENT OF WITHHOLDING TAX BY GINNERS. [Section 153(5)(bb)] Amendment has been made in section 153 allowing ginners to pay withholding tax instead of deduction being made from payments by the withholding agents. However, the ginners will be required to furnish evidence of payment of tax to the withholding agents and the withholding agents will still be required to file prescribed statements of withholding tax, inter-alia, on the basis of challans provided by the ginners. However, in the absence of evidence of payment withholding agents shall deduct tax as required under the law. 2010 – 2011 141 The Income Tax Ordinance, 2001 (c) the purchase of an asset under a lease and buy back agreement by a modaraba, leasing company, banking company or financial institution; or (d) any payment for securitization of receivables by a Special Purpose Vehicle to the Originator1[;or] 2[(e) [3] 4[(6) The tax deducted under this section shall be a final tax on the income of a resident person arising from from transactions referred to in sub-section (1) or (1A): Provided that sub-section (6) shall not apply to companies in respect of transactions referred to in clause (b) of subsection (1)]5[: Ï Provided further that this sub-section shall not apply to payments received on account of— (i) advertisement services, by owners of newspapers and magazines; (ii) sale of goods and execution of contracts by a public company listed on a registered stock exchange in Pakistan]6[; and (iii) the rendering of or providing of services referred to in sub-clause (b) of sub-section (1): Provided that tax deducted under sub-clause (b) of sub-section (1) of section 153 shall be minimum tax. ] 7[ ∇(6A) The provisions of sub-section (6) in so far as they relate to payments on account of supply of goods from which tax is deductible under this section shall not apply in respect of 8[a company] being a manufacturer of such goods.[9]] The full stop substituted by the Finance Act, 2005. Inserted by the Finance Act, 2005. 3 Clause (e) omitted by the Finance Act, 2008, the omitted clause read as follows: (e) a payment made by a Small Company as defined in section 2. 4 Subsection (6) substituted by the Finance Act, 2006, the old subsection read as follow: (6) The tax deducted under this section shall be a final tax on the income of a resident person arising from transactions referred to in 4[clause] (a) or (c) of sub-section (1). 5 Colon substituted for full stop and Proviso inserted by the Finance Act, 2007. Ï EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. TAXATION OF SERVICES PROVIDED BY NEWS PAPER/MAGAZINE OWNERS. [Section 153(6)] Amendment has been made in section 153(6) to exclude non-corporate (Individual and AOP) owners of newspapers and magazines from the ambit of presumptive tax regime (PTR). TAXATION OF CONTRACTS EXECUTED BY LISTED COMPANIES. [Section 153(6)] Public limited companies listed on a registered stock exchange in Pakistan have been excluded from PTR in respect of payments received: (i) for sale of goods; and (ii) execution of contracts; to bring this income under the normal mode of taxation. Tax deducted from listed companies on account of sale of goods and execution of contracts from 1st July 2007 onwards shall be adjustable. For this purpose a proviso has been added to section 153(6) of the Income Tax Ordinance, 2001. 6 Semicolon and the word “and” and sub-clause (iii) with proviso inserted vide the Finance Act, 2009. EXPLANATION VIDE IT CIR. NO. 6 OF 2009 DATED THE 18TH AUGUST, 2009. ELIGIBILITY OF THE CORPORATE SECTOR TO OBTAIN EXEMPTION CERTIFICATE IS REMAINED ACTIVE The position for services rendered by the corporate sector remains unchanged even after the recent amendments as services rendered/provided by corporate sector remain outside the scope of both the final tax regime as well as the minimum tax regime of section 153 of the Income Tax Ordinance. 7 Inserted by the Finance Act, 2005. ∇ EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008INCLUSION OF INDIVIDUAL AND AOPs IN THE PRESUMPTIVE TAX REGIME (PTR). [Section 153(6A) & (6B)]. Tax deducted at source on account of supply of goods was adjustable in the case of companies engaged in manufacturing activity whereas such deduction was final discharge, if the supplies were made by an individual, AOP or companies supplying goods not manufactured by them. Prior to Finance Act 2007, this deduction was adjustable without any exception. Sub section (6B) to section 153 inserted through Finance Act 2007 restricting the adjustability of withholding tax to all manufacturer companies has created confusion with regard to intent of the provision of law. 19.2 In order to remove the confusion, sub-section (6B) has been omitted and sub-section (6A) has suitably been amended to clearly stating that tax withheld on supply of goods would be adjustable against final tax liability in the case of a company engaged in manufacturing and final tax in the case of other company, an individual or association of persons. 8 Substituted for “any person” by the Finance Act, 2008. 9 Words omitted by the Finance Act, 2008, the omitted words read as follows: 1 2 2010 – 2011 142 The Income Tax Ordinance, 2001 1[(6B)] [2] 3[(7)] (8) Where any tax is deducted by a person making a payment to a Special Purpose Vehicle, on behalf of the Originator, the tax is credited to the Originator. 4[(8A)]Î (9) In this section, – “prescribed person” means – (a) the Federal Government; 5(b) a company [6]; The provision of this sub-section shall be deemed always to have been so enacted and shall have had effect accordingly. 1 Sub section inserted by the Finance Act, 2007. 2 Sub-section 6(b) omitted by the Finance Act, 2008, the omitted sub-section read as follows: Í The provisions of sub-section (6) in so far as they relate to payments on account of sale of goods from which tax is deductible under this section shall apply on account of an individual and AOP. This sub-section shall be applicable from tax year 2007. Í EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. TAX DEDUCTED ON PAYMENTS MADE TO NON-CORPORATE TAXPAYERS (INDIVIDUALS & AOPs) TO BE COVERED BY PTR. [Section 153(6B)] Section 153(6A) was introduced last year which excluded all manufacturers from presumptive tax regime in respect of sale of goods. A new sub-section (6B) has been added which provides that tax deductible on sale of goods will be discharge of the final tax liability in the case of an individual and AOP being a manufacturer. Thus the application of sub-section (6A) has now been restricted to corporate manufacturers only. This provision will be effective from tax year 2007. 3 Subsection (7) omitted by the Finance Act, 2006, The omitted subsection read as follows: The tax deducted under this section shall be a final tax on the income of a non-resident person arising from a contract 3[specified in sub-section (3).] 3 Substituted for the words and comma “under a construction, assembly or a like project in Pakistan” by the Finance Ordinance, 2002. 4 Sub section (8A) omitted by the Finance Act, 2007, the omitted sub section read as follows: Â 4 [(8A) Every person from whom tax is being collected under this section shall disclose his National Tax Number to the withholding agent. In case of there being no National Tax Number (NTN), Computerized National Identity Card Number (CNIC) shall be provided. Where a person fails to disclose his NTN or CNIC number, as the case may be, at the time of collection or deduction of tax, the rate of withholding tax shall be two per cent over and above the rates specified in Division III of Part III of the First Schedule;] Â Income Tax Cir. No. 1 dated the 1st July, 2006 ENHANCING WHT RATE – WHERE NTN/CNIC IS NOT DISCLOSED. [Section 153(8A)] A new provision has been incorporated to provide, where supplier of goods and services as well as a person executing a contract does not disclose NTN/CNIC, WHT will be enhanced by 2% over and above the normal rate of withholding tax. This measure has been taken to encourage documentation in economy. 4 Sub-section (8A) inserted by the Finance Act, 2006. SEE EXPLANATION BEFORE 2 PAGES. Î EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. CHARGE OF WITHHOLDING TAX @ 2% OVER AND ABOVE THE PRESCRIBED RATE. [Section 153(8A)] An amendment was made last year providing that in case a person at the time of receiving payments for sale of goods, fails to disclose NTN/CNIC, he shall be liable to WHT rate of 2% over and above the prescribed rate. Sub-section (8A) of section 153 has been omitted and now tax is to be withheld at normal rate from all taxpayers without making any distinction between NTN/CNIC holders and others. 5 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008TAXATION OF “SMALL COMPANY”. [Section 153(9)(b) read with section 2(59A)]. Prior to June 30, 2008, under the provisions of, clause (b) of sub-section (9) of section 153, of the Ordinance, a small company was not required to deduct tax on payments made on sale of goods, services rendered and execution of contracts. The said clause has been amended to make a “Small Company” also liable to withhold tax under the Ordinance like all other corporate taxpayers and AOPs. 20.2 “Small Company” as defined in sub-section (59A) of section 2 of the Ordinance, is one that has paid up capital not exceeding Rs.25 million, employees not exceeding 250 and annual turnover not exceeding Rs.250 million. Income of a Small Company is chargeable to tax @ 20% against general rate of 35% applicable to other companies. Where the turnover exceeds the prescribed limit of Rs.250 million the company looses its status of “Small Company” and all its income becomes taxable at normal rate of 35%. 20.3 In order to facilitate growth of a “small company” if the turnover exceeds Rs.250 million, the income attributable to turnover exceeding the said limit shall be charged to tax at progressive slab rates i.e. 25%, 30% and 35%, so that the company is able to progress, still retaining its incentivised status of a “Small Company”. The new rates are as under: i) Taxable income attributable to turnover upto Rs.250 million. 20% plus tax on ii) Taxable income attributable to turnover exceeding Rs.250 million but does not exceed Rs.350 million 25% plus tax on iii) Taxable income attributable to turnover exceeding Rs.350 million but does not exceed Rs.500 million plus. 30% plus tax on iv) Taxable income attributable to turnover exceeding Rs.500. 35% 6 Words “other than a small company, as defined in clause (59A) of section 2” omitted by the Finance Act, 2008. Earlier it was inserted by the Finance Act, 2005. 2010 – 2011 1(c) 143 The Income Tax Ordinance, 2001 an association of persons 2[constituted by, or under,] law; 3[(cc) a non-profit organization.] (d) a foreign contractor or consultant; 4[] (e) a consortium or joint venture; [5] 6[(f) an exporter or an export house for the purpose of sub-section (1A)]7[; (g) an association of persons, having turnover of fifty million rupees or above in tax year 2007 8[or in any subsequent tax year]] 9[(h) an individual, having turnover of fifty million rupees or above in the tax year 2009 or in any subsequent tax year.] “10[ ]services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee 11 [.] “sale of goods” includes a sale of goods for cash or on credit, whether under written contract or not 12[.] 13[“manufacturer” for the purpose of this section means, a person who is engaged in production or manufacturing of goods, which includes— (a) any process in which an article singly or in combination with other articles, material, components, is either converted into another distinct article or produce is so changed, transferred, or reshaped that it becomes capable of being put to use differently or distinctly; or (b) a process of assembling, mixing, cutting [14] or preparation of goods in any other manner.] EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008ASSOCIATION OF PERSONS (AOPs) TO DEDUCT TAX AS WITHHOLDING TAX AGENTS. [Section 153(9)]. Before amendment only AOPs constituted by or under the law were required to deduct tax at source under section 153(9)(c) relating to payments in respect of supplies, services rendered and execution of contracts. The number of such AOPs were very limited, and other AOPs including those formed as a result of de-corporatization of the existing companies which were handling huge businesses and engaged in different commercial activities like running industries, private hospitals, educational institutions and doing business on whole sale basis were not required to act as withholding agent. This anomaly was causing revenue loss besides discouraging corporatization and documentation of economy. 21.2 In view of this, AOPs having turnover exceeding Rs.50 million in tax year 2007 and onwards have been included in the definition of “Prescribed Person”, under sub-section (9) of section 153, who would be required to deduct tax at the time of making payments on account of sales, services rendered and execution of contracts, as the case may be. • AOPs having turnover exceeding Rs.50 million has also inserted in SRO 586(I)/91 dated the 30th June, 1991 vide SRO 1248(I)/2008 dated the 4th December, 2008. 2 Substituted for the words “registered under” by the Finance Ordinance, 2002. 3 Clause (cc) inserted vide the Finance Act, 2009. 4 Word “or” omitted by the Finance Act, 2006. 5 Word “or” omitted by the Finance Act, 2008, earlier it was inserted by the Finance Act, 2006. 6 Sub-clause (f) inserted by the Finance Act, 2006. 7 Semicolon substituted for full stop and clause (g) inserted by the Finance Act, 2008. 8 Substituted for “and onwards” vide the Finance Act, 2010. 9 Clause (h) inserted vide the Finance Act, 2010. 10 Word “professional” omitted by Finance Act, 2003 11 Substituted for semi colon and word “; and” by the Finance Ordinance, 2002. 12 Substituted for semi colon and word “; and” by the Finance Ordinance, 2002. 13 Expression “manufacturer” inserted by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008DEFINITION OF “MANUFACTURER” FOR THE PURPOSE OF WITHHOLDING TAX UNDER SECTION 153. Tax deducted from payments received on account of supply of goods is adjustable in the case of a company being a manufacturer, whereas in the case AOP and individual taxpayers, it is final tax. The term “Manufacturer” has not been defined in the Ordinance due to which the application of the said provisions become difficult as there was always difference of opinion on the status of a person being a manufacturer or otherwise. 22.2 For clarity in the law, and to avoid un-necessary litigation, the term “Manufacturer” has been defined in section 153 of the Ordinance. This would help taxpayers as well as tax department in clear application of the provisions of sub-section (6A) of section 153 of the Ordinance. 1414 Words “, packing, repacking” omitted vide the Finance Act, 2009. 1 2010 – 2011 144 The Income Tax Ordinance, 2001 1[153A. Payments to non-resident media persons.— Every person making a payment for advertisement services to a non-resident media person relaying from outside Pakistan shall deduct tax from the gross amount paid at the rate specified in Division IIIA of Part III of the First Schedule.] 2154. Exports.- (1) Every authorised dealer in foreign exchange shall, at the time of realisation of foreign exchange proceeds on account of the export of goods by an exporter, deduct tax from the proceeds at the rate specified in Division IV of Part III of the First Schedule. (2) Every authorised dealer in foreign exchange shall, at the time of realisation of foreign exchange proceeds on account of the commission due to an indenting commission agent, deduct tax from the proceeds at the rate specified in Division IV of Part III of the First Schedule. (3) Every banking company shall, at the time of realisation of the proceeds on account of a sale of goods to an exporter under an inland back-to-back letter of credit or any other arrangement as prescribed by the Federal Board of Revenue, deduct tax from the amount of the proceeds at the rate specified in Division IV of Part III of the First schedule. 3[(3A) The Export Processing Zone Authority established under the Export Processing Zone Authority Ordinance, 1980 (VI of 1980), shall at the time of export of goods by an industrial undertaking located in the areas declared by the Federal Government to be a Zone within the meaning of the aforesaid Ordinance, collect tax at the rate specified in Division IV of Part III of the First Schedule. (3B) Every direct exporter and an export house registered under the Duty and Tax Remission for Exports Rules, 2001 provided in Sub-Chapter 7 of Chapter XII of the Customs Rules, 2001 shall, at the time of making payment for a firm contract to an indirect exporter defined under the said rules, deduct tax at the rates specified in Division IV of Part III of the First Schedule.] 4[(3C) The Collector of Customs at the time of clearing of goods exported shall collect tax from the the gross value of such goods at the rate specified in Division IV of Part III of the First Schedule.] (4) The tax deducted under 5[this section] shall be a final tax on the income arising from the referred to in this section] 6[transactions 1 Section 153A inserted by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008WITHHOLDING TAX ON ADVERTISING THROUGH ELECTRONIC MEDIA. [Section 153(A)]. There was serious discrimination regarding taxation of advertisement receipts between media companies relaying from Pakistan and outside Pakistan. Payments made to media companies outside Pakistan are invariably restricted for taxation due to treaty protection or monitoring mechanism. To provide level playing field to the media companies and to enforce withholding tax @ 10% on all advertising payments made from Pakistan, the amendment in the law has been made and a new section (153A) inserted, to collect tax on such payment so that tax collected be treated as final tax as provided in section 169 of the Ordinance. 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009COLLECTION OF TAX FROM EXPORTERS RECEIVING EXPORT PROCEEDS IN CASH. [Section 154 – Division-IV, Part-III of First Schedule] Under section 154 of the Ordinance, every authorized dealer in foreign exchange is required to deduct tax at the time of realization of foreign exchange proceeds on account of export of goods. There is a special arrangement for export of goods to Afghanistan whereby goods are exported without Form “E” and export proceeds are directly received by the exporters in local currency. Such exports are allowed in terms of para (7) of SRO 759(1)/2008 dated 18.07.2008. Since the export proceeds are not realized in foreign exchange through authorized dealers, therefore, no tax is collected thereon. In order to cover the above situation, a new sub-section (3C) has been inserted which provides that in respect of goods exported without Form “E” the Collector of Customs shall collect tax @ 1% at the time of clearing such goods for export. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008RATIONALIZATION OF TAX RATES ON EXPORTS – [Section 154]. To encourage exports, a reduced tax rate regime was provided under section 154 read with clauses (14) and (15) of Part II of the 2nd Schedule to the Ordinance, whereby export of branded rice, canned fish, precious and semiprecious stone etc. was subjected to reduced rate of 0.75% against normal rate of 1%. The discrimination in tax rates had not only been objected to by different export houses but such treatment was also considered as unfair. To remove this distortion and provide level playing field to the entire export sector, the clauses (14) and (15) of Part II of the 2nd Schedule have been omitted, by virtue of which withholding tax on all exports under section 154 would be subjected to tax @ 1%. However, it would remain as final tax for such exports as before. 3 Sub-sections (3A) & (3B) inserted by Finance Act, 2003 4 Sub-section (3C) inserted vide the Finance Act, 2009. 5 Substituted for “sub-section 5[(1) , (3), (3A) or (3B)]” by the Finance Act, 2006. 5 Substituted for “or (3)” bt Finance Act, 2003 6 Substituted for “export 6[or sale to an exporter.] 6 Added by the Finance Ordinance, 2002.” By the Finance Act, 2007. 2010 – 2011 145 The Income Tax Ordinance, 2001 1Income from property.- (1) 2[Every] prescribed person making a payment in full or part 155. (including a payment by way of advance) to any person on account of rent of immovable property (including rent of furniture and fixtures, and amounts for services relating to such property) shall deduct tax from the gross amount of rent paid at the rate specified in Division V of Part III of the First Schedule. 3[Explanation.—“gross amount of rent” includes the amount referred to in sub-section (1) or (3) of section 16, if any.] [(2)]4 5[(3) (i) In this section, “prescribed person” means— the Federal Government; (ii) a Provincial Government; (iii) a 6[Local Government]; (iv) a company; (v) a non-profit organization; (vi) a diplomatic mission of a foreign state; or (vii) any other person notified by the Federal Board of Revenue for the purpose of this section.] 156. Prizes and winnings.- (1) Every person paying 7[prize on] a prize bond, or winnings from a raffle, lottery, 8[prize on winning a quiz, prize offered by companies for promotion of sale,] or cross-word puzzle shall deduct tax from the gross amount paid at the rate specified in Division VI of Part III of the First Schedule. 9[(2) Where a prize, referred to in sub-section (1), is not in cash, the person while giving the prize shall collect tax on the fair market value of the prize.] 1[(3) In this section, “prescribed person” means— 1 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 20082.1 To remove this distortion and ensure universally accepted principle of progressive taxation of income, it has been subjected to progressive rates of tax i.e. 5%, 10% and 15%. No tax would, however, be deducted/paid on rent upto Rs.150,000/- per annum, in the case of individuals and AOPs having no other source of income. EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. APPLICATION OF PTR IN RESPECT OF RENTAL RECEIPTS LESS THAN Rs.150,000/-. [Section 155] Under section 155, a prescribed person is required to deduct tax @ 5% at the time of making payment on account of rent of immoveable property, which is treated as final tax liability of the taxpayer. No threshold is prescribed for deduction of tax on such payments. On the other hand, section 15(7) envisages that no tax is chargeable in respect of income from property not exceeding Rs.150,000/-, in the case of an individual or AOP, who does not derive taxable income under any other head. An amendment has been made in section 155(2) by inserting the words “subject to section 5” by virtue of which tax deducted in such cases will be refundable. 2 Substituted for “Subject to sub-section (2), every” by the Finance Act, 2006. 3 Explanation as available in the Finance Act, 2006. 4 Sub-section (2) omitted vide the Finance Act, 2010, the omitted sub-section with amendment details read as follows: 4[(2) The tax deducted under sub-section (1) shall be a final tax on the income from property [ 4].] 4Sub-section (2) substituted by the Finance Act, 2006. The old sub-section read as follows: (2) Sub-section (1) shall apply only where the annual rent exceeds 4[three] hundred thousand rupees. 4 Substituted for the word 1A[“two”] by the Finance Act, 2004. 1A Earlier the word “one” was substituted by the Finance Act, 2003 4 Words “subject to section 15” omitted by the Finance Act, 2008, earlier these words inserted by the Finance Act, 2007. 5 Sub-section (3) substituted by the Finance Act, 2006. The old subsection read as follows: (3) In this section, “prescribed person” means the Federal Government, a Provincial Government, local authority, a company, a non-profit organisation or a diplomatic mission of a foreign state. 6 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 7 Inserted by the Finance Ordinance, 2002. 8 Inserted by Finance Act, 2003 9 Substituted for “(2) Where a payment under sub-section (1) is not in cash, the person making the payment shall collect the tax due under that subsection from the recipient of the payment.” By Finance Act, 2003 2010 – 2011 (i) 146 The Income Tax Ordinance, 2001 the Federal Government; (ii) a Provincial Government; (iii) a 2[Local Government]; (iv) a company; (v) a non-profit organization; (vi) a diplomatic mission of a foreign state; or (vii) any other person notified by the Federal Board of Revenue for the purpose of this section.] 3[156A. Petroleum Products.- (1) Every person selling petroleum products to a petrol pump operator shall deduct tax from the amount of commission or discount allowed to the operator at the rate specified in Division VIA of Part III of the First schedule. (2) The tax deducted under sub-section (1) shall be a final tax on the income arising from the sale of petroleum products to which sub-section (1) applies.] 4[156B. Ê Withdrawal of balance under Pension Fund.- (1) A pension fund manager making payment from individual pension accounts, maintained under any approved Pension Fund, shall deduct tax at the rate specified in sub-section (6) of section 12 from any amount – (a) withdrawn before the retirement age 5[: Provided that the tax shall not be deducted in case of the eligible person suffering from any disability as mentioned in subrule (2) of rule 17 of the Voluntary Pension System Rules, 2005 which renders him unable to continue with any employment at the age which he may so elect to be treated as the retirement age or the age as on the date of such disability if not so elected by him: Provided further that the tax shall not be deducted on the share of the nominated survivor of the deceased eligible person and would be treated as if the eligible person had reached the age of retirement;] (b) withdrawn, if in excess of 25% of his accumulated balance at or after the retirement age: 6[Provided that the tax shall not be deducted in case, the balance in the eligible persons’ individual pension account is invested in an approved income payment plan of a pension fund manager Sub-section (3) substituted by the Finance Act, 2006. The old sub-section read as follows: [(3) The tax deducted under sub-section (1) or collected under section (2) shall be final tax on the income from prizes or winnings referred to in the said sub-sections.] 1 Substituted by the Finance Ordinance, 2002. The original sub-section (3) read as follows: “(3) The tax deducted under sub-section (1) shall be a final tax on the prize bond or winnings.“ 2 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 3 Added by the Finance Act, 2004. 4 Inserted by the Finance Act, 2005. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. WITHDRAWAL OF BALANCE UNDER PENSION FUND. [Section 156B] A new section 156B has been introduced making it mandatory for pension fund manager making payment from individual pension accounts, maintained under an approved pension fund, to deduct tax at the rate specified in sub-section (6) of section 12 from any amount.– (a) withdrawn before the retirement age; (b) withdrawn, if in excess of 25% of his accumulated balance at or after the retirement age: Tax shall not be deducted in case, the balance in the persons’ individual pension account is invested in an approved income payment plan of a pension fund manager or paid to a life insurance company for the purchase of an approved annuity plan or is transferred to another individual pension account of the taxpayer maintained with any other Pension Fund Manager under Change of Pension Fund Manager option specified in the Voluntary Pension System Rules, 2005. 5 Colon substituted for semicolon and Provisos added by the Finance Act, 2006. 6 Proviso substituted by the Finance Act, 2006, the old proviso read as follows: Provided that the tax shall not be deducted in case, the balance in the persons’ individual pension account is invested in an approved income payment plan of a pension fund manager or paid to a life insurance company for the purchase of an approved annuity plan or 1 1 2010 – 2011 147 The Income Tax Ordinance, 2001 or paid to a life insurance company for the purchase of an approved annuity plan or is transferred to an other individual pension account of the eligible person or the survivors’ pension account in case of death of the eligible person maintained with any other pension fund manager as specified in the Voluntary Pension System Rules, 2005;] 1[157.] 2[158. Time of deduction of tax.- A person required to deduct tax from an amount paid by the person shall deduct tax - (a) in the case of deduction under section 151, at the time the amount is 3[paid or] credited to the account of recipient4[, whichever is earlier] ; and (b) in other cases, at the time the amount is actually paid.] Division IV General Provisions Relating to the Advance Payment of Tax or the Deduction of Tax at Source 159. Exemption or lower rate certificate.- (1) Where the Commissioner is satisfied that an amount 5[ ]to which Division II or III of this Part 6[or Chapter XII] applies is – (a) exempt from tax under this Ordinance; or (b) subject to tax at a rate lower than that specified in the First Schedule, the Commissioner shall, upon application in writing by the person, issue the person with an exemption or lower rate certificate. 7[(1A) The Commissioner shall, upon application from a person whose income is not likely to be chargeable to tax under 8[ ] this Ordinance, issue exemption certificate for the profit on debt referred to in clause (c) of sub-section (1) of section 151.] (2) A person required to collect advance tax under Division II of this Part or deduct tax from a payment under Division III of this Part 9[or deduct or collect tax under Chapter XII] shall collect or deduct the full amount of tax specified in Division II or III 10[or Chapter XII], as the case may be, unless there is in force a certificate issued under sub-section (1) relating to the collection or deduction of such tax, in which case the person shall comply with the certificate. is transferred to another individual pension account of the taxpayer maintained with any other Pension Fund Manager under Change of Pension Fund Manager option specified in the Voluntary Pension System Rules, 2005.] 1 Omitted by the Finance Ordinance, 2002. The omitted section 157 read as follows: “157. Petroleum products.- (1) Every person selling petroleum products to a petrol pump operator shall deduct tax from the amount of commission or discount allowed to the operator at the rate specified in Division VII of Part III of the First Schedule. (2) The tax deducted under sub-section (1) shall be a final tax on the income arising from the sale of petroleum products to which sub-section (1) applies.” 2 Substituted by the Finance Ordinance, 2002. The original section 158 read as follows: “158. Time of deduction of tax.- A person required to deduct tax from an amount paid by the person shall deduct the tax at the earlier of – (a) the time the amount is credited to the account of the recipient; or (b) the time of amount is actually paid.” 3 Inserted by the Finance Act, 2003 4 Inserted by the Finance Act, 2003 Inter-account adjustments of receivable/collectable against payable which carried out through ledger accounts or journals maintained by the persons and such “adjustments” Shall also construed as “payments” or “actually paid” and tax shall withheld there from. The person who is making such inter-account adjustments is so required to withhold tax under the relevant provisions of law at the relevant rates and in case of any default; provisions of the Ordinance shall apply accordingly. IT Circular No. 1 dated the 20th February, 2009 5 Words “paid to a person” omitted by Finance Act, 2003 6 Inserted by the Finance Ordinance, 2002. 7 Sub-section (1A) inserted by Finance Act, 2003 8 The word “the” omitted by the Finance Act, 2004. 9 Inserted by Finance Act, 2003 10 Inserted by Finance Act, 2003 2010 – 2011 1[(3) 2[The (a) 148 The Income Tax Ordinance, 2001 Board may, from time to time, by notification in the official Gazette – amend the rates of withholding tax prescribed under this Ordinance; or (b) exempt persons, class of persons, goods or class of goods from withholding tax under this Ordinance.] (4) All such amendments shall have effect in respect of any tax year beginning one any date before or after the commencement of the financial year in which the notification is issued and shall not be applicable in respect of income on which tax withheld is treated as discharge of final tax liability. (5) The Board shall place all notifications issued under sub-section (3) in a financial year before both Houses of Majlis-e-Shoora (Parliament).] 160. Payment of tax collected or deducted.- Any tax that has been collected or purported to be collected under Division II of this Part or deducted or purported to be deducted under Division III of this Part 3[or deducted or collected, or purported to be deducted or collected under Chapter XII] shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed. 161. Failure to pay tax collected or deducted.- (1) Where a person – (a) fails to collect tax as required under Division II of this Part 4[or Chapter XII] or deduct tax from a payment as required under Division III of this Part 5[or Chapter XII 6[or as required under section 50 of the the repealed Ordinance]] 7[or as required under section 50 of the repealed Ordinance]; or (b) having collected tax under Division II of this Part 8[or Chapter XII] or deducted tax under Division III of this Part 9[or Chapter XII] fails to pay the tax to the Commissioner as required under section 160, 10[or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under sub-section (8) of section 50 of the repealed Ordinance,] the person shall be personally liable to pay the amount of tax to the Commissioner 11[who may 12[pass an order to that effect and] proceed to recover the same.] 13[(1A) No recovery under sub-section (1) shall be made unless the person referred to in sub-section (1) has been provided with an opportunity of being heard. (1B) Where at the time of recovery of tax under sub-section (1) it is established that the tax that was to be deducted from the payment made to a person or collected from a person has meanwhile been paid by that person, no recovery shall be made from the person who had failed to collect or deduct the tax but the Sub sections (3), (4) and (5) inserted by the Finance Act, 2007. Sub-section (3) substituted by the Finance Act, 2008. The old sub-section read as follows: “The Board may, from time to time, by notification in the official Gazette, amend the rates of withholding tax prescribed under the Ordinance.” EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008EMPOWERING FBR TO ALLOW EXEMPTION FROM WITHHOLDING TAXES. [Section 159(3)]. In order to allow speedy relief in suitable cases, necessary amendments have been made in sub-section (3) of section 159 of the Ordinance, empowering FBR to exempt persons, class of persons, goods or class of goods or payments etc. from the application of any provisions of the Ordinance relating to withholding taxes. The main objective of this amendment is to allow relief in hardship cases at Board’s level. 3 Inserted by the Finance Ordinance, 2002. 4 Inserted by Finance Act, 2003 5 Inserted by the Finance Ordinance, 2002. 6 Inserted by the Finance Act, 2003 7 Words and figure inserted by the Finance Act, 2003 8 Inserted by Finance Act, 2003 9 Inserted by the Finance Ordinance, 2002. 10 Inserted by the Finance Act, 2003 11 Inserted by the Finance Ordinance, 2002. 12 Inserted by the Finance Act, 2003. 13 New sub-sections “(1A) & (1B)” inserted by the Finance Ordinance, 2002. 1 2 2010 – 2011 149 The Income Tax Ordinance, 2001 said person shall be liable to pay 1[default surcharge] at the rate of eighteen percent per annum from the date he failed to collect or deduct the tax to the date the tax was paid.] (2) A person personally liable for an amount of tax under sub-section (1) as a result of failing to collect or deduct the tax shall be entitled to recover the tax from the person from whom the tax should have been collected or deducted. 162. Recovery of tax from the person from whom tax was not collected or deducted.- (1) Where a person fails to collect tax as required under Division II of this Part 2[or Chapter XII] or deduct tax from a payment as required under Division III of this Part 3[or Chapter XII,] the Commissioner may 4[pass an order to that effect and ]recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made. (2) The recovery of tax under sub-section (1) does not absolve the person who failed to deduct tax as required under Division III of this Part 5[or Chapter XII] from any other legal action in relation to the failure, or from a charge of 6[default surcharge] or the disallowance of a deduction for the expense to which which the failure relates, as provided for under this Ordinance. 163. Recovery of amounts payable under this Division.- The provisions of this Ordinance shall apply to any amount required to be paid to the Commissioner under this Division as if it were tax due under an assessment order. 7Certificate of collection or deduction of tax.- (1) Every person collecting tax under Division II 164. of this Part or deducting tax from a payment under Division III of this Part 8[or 9[deducting or collecting tax under] Chapter XII] shall, at the time of collection or deduction of the tax, furnish to the person from whom the tax has been collected or to whom the payment from which tax has been deducted has been made, 10[copies of the challan of payment or any other equivalent document alongwith] a certificate setting out the amount of tax collected or deducted and such other particulars as may 11[ ] be prescribed. (2) A person required to furnish a return of taxable income for a tax year shall attach to the return of the challan of payment on the basis of which a certificate is] provided to the person under this section in respect of tax collected or deducted in that year 13[and such certificate shall be treated as sufficient evidence of the collection or deduction for the purposes of section 168.] 12[copies 165. Statements.- (1) Every person collecting tax under Division II of this Part 14[or Chapter XII] or deducting tax from a payment under Division III of this Part 15[or Chapter XII] shall, [16] furnish to the Commissioner a statement in the prescribed form setting out– Substituted for “additional tax” vide the Finance Act, 2010. Inserted by the Finance Act, 2003. 3 Inserted by the Finance Ordinance, 2002. 4 Inserted by the Finance Act, 2003 5 Inserted by the Finance Ordinance, 2002. 6 Substituted for “additional tax” vide the Finance Act, 2010. 7 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009FILING OF COPIES OF PAID CHALLANS ALONGWITH CERTIFICATE OF DEDUCTION. [Section 164] Previously a taxpayer was entitled to claim credit of tax collected/deducted on the basis of prescribed tax deduction certificate. At times withholding agents either do not deposit the tax deducted from the taxpayers or deposit the same on behalf of other persons who may claim credit of the same. In order to rectify this anomalous situation amendment has been made in sub-sections (1) and (2) of section 164 requiring the taxpayers to furnish copies of paid challans or other equivalent documents alongwith certificate of deductions for claming credit of the same. 8 Inserted by the Finance Ordinance, 2002. 9 Inserted by the Finance Act, 2003 10 Words inserted vide the Finance Act, 2009. 11 The words “pass an order to that effect and” omitted by the Finance Act, 2004. Earlier these words were inserted by the Finance Act, 2003. 12 Substituted for “any certificate” vide the Finance Act, 2009. 13 Added by the Finance Ordinance, 2002. 14 Inserted by the Finance Act, 2003. 15 Inserted by the Finance Ordinance, 2002. 16 Words omitted vide the Finance Act, 2010, the omitted words read as follows: “within two months after the end of 16[EACH QUARTER] or within such further time as the Commissioner may allow by 16[order] in writing,” 16 Substituted for “notice” by the Finance Act, 2003 16 Substituted for “THE FINANCIAL YEAR” vide the Finance Act, 2010. 1 2 2010 – 2011 150 The Income Tax Ordinance, 2001 (a) the name and address of each person from whom tax has been collected under Division II of this Part Chapter XII] or to whom payments have been made from which tax has been deducted under Division Division III of this Part 2[or Chapter XII] in 3[each quarter]; 1[or (b) the total amount of payments made to a person from which tax has been deducted under Division III of this Part 4[or Chapter XII] in 5[each quarter]; (c) the total amount of tax collected from a person under Division II of this Part 6[or Chapter XII] or deducted from payments made to a person under Division III of this Part 7[or Chapter XII] in 8[each quarter]; and (d) such other particulars as may be prescribed 9[: Provided that every person as provided in sub-section (1) shall be required to file withholding statement even where no withholding tax is collected or deducted during the period.] 10[(2) Every prescribed person collecting tax under Division II of this Part or Chapter XII or deducting tax under Division III of this Part or Chapter XII shall furnish statements under sub-section (1) as per the following schedule, namely:(a) in respect of the September quarter, on or before the 20th day of October; (b) in respect of the December quarter, on or before the 20th day of January; (c) in respect of the March quarter, on or before the 20th day of April; and (d) in respect of the June quarter, on or before the 20th day of July.] Inserted by the Finance Act, 2003. Inserted by the Finance Ordinance, 2002. 3 Substituted for “the year” vide the Finance Act, 2010. 4 Inserted by the Finance Ordinance, 2002. 5 Substituted for “the year” vide the Finance Act, 2010. 6 Inserted by the Finance Act, 2003. 7 Inserted by the Finance Ordinance, 2002. 8 Substituted for “the year” vide the Finance Act, 2010. 9 Colon substituted for full stop and proviso inserted vide the Finance Act, 2010. 10 Substituted vide the Finance Act, 2010, the replaced text with amendment details read as follows: Â (2) In addition to the annual statement required to be furnished under sub-section (1), a person collecting tax under Division II of this Part 10[or Chapter XII] or deducting tax under Division III of this Part 10[or Chapter XII] may be required to furnish statements on a 10[monthly,] quarterly or six monthly basis as may be prescribed. Â Income Tax Cir. No. 1 dated the 1st July, 2006 Monthly withholding tax return/statement. [Section 165(2)] In order to improve withholding taxes regime, provision has been made to make mandatory for withholding agents to file a monthly return of withholding taxes. STATEMENT REGARDING THIRD PARTY INFORMATION. [Section 165(3)] A new sub-section (3) has been added to section 165, which empowers CBR to prescribe a statement to be furnished periodically. Containing information as required. PERIODICAL STATEMENTS – EXTENSION OF TIME FOR FILING. [Section 165(4)] Every withholding agent is required to furnish annual statement to the Commissioner within two months after the end of the financial year or within such further time as the Commissioner may allow by order in writing. Withholding agents are also required to file quarterly statements. However, for filing of quarterly statement, law does not empower the Commissioner to extend the date even in genuine cases. Commissioner has now been empowered to allow extension of time in hardship cases. ELECTRONIC FILING OF WHT STATEMENTS. [Section 165(5)] With rapid advances in technology taking place, the concept of E- Government has already become popular not only in technologically advanced countries but even in developing countries. The obvious advantages are improvement in efficiency, facilitation etc. In the ongoing reform process in Pakistan, automation figures prominently. Law also provides facility of electronic filing of income tax returns. On the analogy of provisions prescribed for E-filing of Income Tax Returns, amendment has been made in law, enabling CBR to prescribe mandatory e-filing of statements by prescribed classes of withholding agents. 10 Inserted by the Finance Act, 2003. 10 Inserted by the Finance Ordinance, 2002. 10 Word and comma inserted by the Finance Act, 2006. 1 2 2010 – 2011 151 The Income Tax Ordinance, 2001 1[(3) Federal Board of Revenue may prescribe a statement requiring any person to furnish information periodically in respect of any transactions in the prescribed form and verified in the prescribed manner. (4) A person required to furnish a statement under sub-section 2[(1)], may apply in writing, to the Commissioner for an extension of time to furnish the statement after the due date and the Commissioner if satisfied that a reasonable cause exists for non-furnishing of the statement by the due date may, by an order in writing, grant the applicant an extension of time to furnish the statement. (5) The Board may make rules relating to electronic furnishing of statements under this section including,— (a) mandatory electronic filing of statements; and (b) determination of eligibility of the data of such statements and e-intermediaries, etc.] 166. Priority of tax collected or deducted.- (1) Tax collected by a person under Division II 3[of this Part or or Chapter XII] or deducted from a payment under Division III of this Part 4[or Chapter XII] shall be – (a) held by the person in trust for the 5[Federal] Government; and (b) not subject to attachment in respect of any debt or liability of the person. (2) In the event of the liquidation or bankruptcy of a person who has collected 6[ ]or deducted tax from a payment under Division III of this Part 7[or Chapter XII], the amount collected or deducted shall not not form part of the estate of the person in liquidation or bankruptcy and the Commissioner shall have a first claim for that amount before any distribution of property is made. 8[or (3) Every amount that a person is required to deduct from a payment under Division III of this Part Chapter XII] shall be – (a) a first charge on the payment; and (b) deducted prior to any other amount that the person may be required to deduct from the payment by virtue of an order of any Court or under any other law. 167. Indemnity.- A person who has deducted tax from a payment 9[Division III of this part] 10[or Chapter XII] and remitted the deducted amount to the Commissioner shall be treated as having paid the deducted amount to the recipient of the payment for the purposes of any claim by the recipient for payment of the deducted tax. 168. Credit for tax collected or deducted.- (1) For the purposes of this Ordinance – (a) the amount of any tax deducted from a payment under Division III of this Part 11[or Chapter XII] shall be treated as income derived by the person to whom the payment was made; and (b) the amount of any tax collected under Division II of this Part 12[or Chapter XII] or deducted under Division III of this Part 1[or Chapter XII] shall be treated as tax paid by the person from whom the tax was collected or deducted. Sub-section (3), (4) & (5) added by the Finance Act, 2006. Substituted for “(2)” vide the Finance Act, 2010. 3 Inserted by the Finance Act, 2003. 4 Inserted by the Finance Ordinance, 2002. 5 Inserted by the Finance Act, 2003. 6 Words “tax under Division II of this Part” omitted by the Finance Act, 2003 7 Inserted by the Finance Ordinance, 2002. 8 Inserted by the Finance Act, 2003. 9 Substituted for “under 9[Division II,] Division III” by the Finance Act, 2003 10 Inserted by the Finance Ordinance, 2002. 11 Inserted by the Finance Ordinance, 2002. 12 Inserted by the Finance Act, 2003. 1 2 2010 – 2011 152 The Income Tax Ordinance, 2001 (2) Subject to sub-sections (3) and (4), where an amount of tax has been collected from a person under Division II of this Part 2[or Chapter XII] or deducted from a payment made to a person under Division III of this Part 3[or Chapter XII], the person shall be allowed a tax credit for that tax in computing the tax due by the person on the taxable income of the person for the tax year in which the tax was collected or deducted. No tax credit shall be allowed for any tax collected or deducted that is a final tax under [4] (a), (b) or (d) of subsection (1) of section 151, sub-section (1B) of section 152,] 6[sub-section (6)] of section 153, sub-section (4) of section 154, 7[section 155,] sub-section (3) of section 156, 8[sub-section (2) of section 156A, section 233, clauses (a) or (b) of sub-section (1) of section 233A] or 9[sub-section (5) of section 234 10[or section 234A].] (3) 5[clauses (4) A tax credit allowed under this section shall be applied in accordance with sub-section (3) of section 4. (5) A tax credit or part of a tax credit allowed under this section for a tax year that is not able to be credited under sub-section (3) of section 4 for the year shall be refunded to the taxpayer in accordance with section 170. 11[(6) Notwithstanding anything contained in any other law or any rules for the time being in force, no amount shall be deducted on account of service charges from the tax withheld or collected by any person under the provisions of this Ordinance. (7) In case any amount is deducted on account of service charges, by the person, the said person will be liable to pay the said amount to the Federal Government and all the provisions of this Ordinance shall apply in so far as they apply to the recovery of tax.] 169. Tax collected or deducted as a final tax.- (1) This section shall apply where – (a) the collection of advance tax is a final tax under sub-section (7) of section 148 12[or sub-section (5) of section 234 13[or section 234A]] on the income to which it relates; or (b) the deduction of tax is a final tax under 14[clauses (a), (b) and (d) of sub-section (1) of section 151, subsection (1B) 15[or sub-section (1BB)] of section 152,] 16[sub-section (6)] of section 153, 17 [section 153A,] sub- Inserted by the Finance Ordinance, 2002. Inserted by the Finance Act, 2003. 3 Inserted by the Finance Ordinance, 2002. 4 Words “sub-section (7) of section 148,” omitted vide the Finance Act, 2009. 5 Words, brackets, commas and figures inserted by the Finance Act, 2006. 6 Substituted for “sub-sections (6) or (7)” by the Finance Act, 2006. 7 Inserted by the Finance Act, 2006. 8 Inserted by the Finance Act, 2006. 9 Substituted for the words, brackets and figures “sub-section (2) of section 157” by the Finance Ordinance, 2002 10 The comma, word, figure and letter inserted by the Finance Act, 2007. 11 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009CLAIM OF SERVICE CHARGES ON COLLECTION/DEDUCTION OF TAX BY THE WITHHOLDING AGENTS. [Section 168] Under the Income Tax Ordinance, 2001 the Withholding Agents are not entitled to receive any services charges for collection or deduction of tax as a Withholding Agent. However, it has been noticed that certain withholding agents including Provincial Governments and other autonomous organization are claming services charges for acting as Withholding Agents. In order to expressly disallow such claims, new sub-sections (6) and (7) have been inserted in section 168 which provides that notwithstanding any thing contained in any other law or any rules, for the time being in force, no amount is to be deducted on account of service charges from the tax withheld or collected by any person under the provisions of this Ordinance. As provided in sub-section (7) in case any amount is deducted on account of services charges by the person, the said person will be liable to pay this amount to the Federal Government and all the provisions of the Ordinance shall apply in so far as they apply to the recovery of tax. Sub-sections (6) and (7) inserted vide the Finance Act, 2009. 12 Inserted by the Finance Act, 2003 13 The comma, word, figure and letter inserted by the Finance Act, 2007. 14 Words, brackets, letters, figures, and commas inserted by the Finance Act, 2006. 15 Inserted by the Finance Act, 2008. 16 Substituted for “sub-sections (6) or (7)” by the Finance Act, 2006. 17 Inserted by the Finance Act, 2008. 1 2 2010 – 2011 153 The Income Tax Ordinance, 2001 section (4) of section 154, [1] sub-section (3) of section 156, 2[sub-section 3[(1) and] (2) of section 156A or subsub-section (3) of section 233[4]] [5] on the income from which it has been deducted. (2) Where this section applies - (a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person; (b) no deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the income; (c) the amount of the income shall not be reduced by – (i) any deductible allowance under Part IX of Chapter III; or (ii) the set off of any loss; (d) the tax deducted shall not be reduced by any tax credit allowed under this Ordinance; and (e) there shall be no refund of the tax collected or deducted 6[unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance.] (3) Where all the income derived by a person in a tax year is subject to final taxation under the provisions referred to in sub-section (1) or under sections 5, 7[Ð(other than dividend received by a company)] 6 8[,] 7 9[and 155], 10[an assessment shall be treated to have been made under section 120 and] the person shall not be required to furnish a return of income under section 114 for the year. 11[Explanation. - The expression, ―an assessment shall be treated to have been made under section 120 means, (a) the Commissioner shall be taken to have made an assessment of income for that tax year, and the tax due thereon equal to those respective amounts specified in the return or statement under sub-section (4) of section 115; and (b) the return or the statement under sub-section (4) of section 115 shall be taken for all purposes of this Ordinance to be an assessment order.] 12[ ] Bracket and figure “section 155,” omitted vide the Finance Act, 2010, earlier it was inserted by the Finance Act, 2006. Inserted by the Finance Act, 2004. 3 Inserted by the Finance Act, 2005. 4 Words “or clause (a) and clause (b) of sub-section (1) of section 233A” omitted by the Finance Act, 2008. 5 The words, figures and brackets “or sub-section (2) of section 157” omitted by the Finance Ordinance, 2002 6 Added by the Finance Ordinance, 2002. 7 The brackets and words inserted by the Finance Act, 2007. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. WHT ON INTER CORPORATE DIVIDEND MADE ADJUSTABLE. [Sections 58 & 169] Inter Corporate dividend was liable to WHT @ 5% which was final tax liability in the case of a company. Amendments have been made in sections 8, 169 and in the First Schedule of the Income Tax Ordinance, 2001 to; (i) exclude dividend received by a company from the ambit of PTR; and (ii) provide for an adjustable uniform rate of 10% applicable for transactions made on or after 1st July 2007. 8 Substituted for “and” vide the Finance Act, 2010. 9 Inserted vide the Finance Act, 2010. 10 Inserted by the Finance Ordinance, 2002. 11 Explanation inserted vide the Finance Act, 2010. 12 Omitted by the Finance Act, 2004. The omitted sub-section (4) read as follows: 2A[“(4) Where a taxpayer, while explaining the nature and source of any amount, investment, money, valuable article, expenditure, referred to in section 111, takes into account any source of income which is subject to tax in accordance with the provisions of sections 148, 153, 154, 156 or sub-section (5) of section 234, he shall not be entitled to take credit of any sum as is in excess of an amount which if taxed at a rate or rates, other than the rate applicable to the income chargeable to tax under aforesaid sections 148, 153, 154, 156 or sub-section (5) of section 234 would have resulted in tax liability equal to the tax payable in respect of income under any of the aforesaid sections.”] 2A Earlier sub-section (4) was added by the Finance Act, 2002. 1 2 2010 – 2011 154 The Income Tax Ordinance, 2001 PART VI REFUNDS 170. Refunds.- (1) A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess. 1[(1A) Where any advance or loan, to which sub-clause (e) of clause (19) of section 2 applies, is repaid repaid by a taxpayer, he shall be entitled to a refund of the tax, if any, paid by him as a result of such advance or loan having been treated as dividend under the aforesaid provision.] (2) An application for a refund under sub-section (1) shall be – (a) made in the prescribed form; (b) verified in the prescribed manner; and (c) made within two years of the later of (i) the date on which the Commissioner has issued the assessment order to the taxpayer for the tax year to which the refund application relates; or (ii) the date on which the tax was paid. (3) Where the Commissioner is satisfied that tax has been overpaid, the Commissioner shall - (a) apply the excess in reduction of any other tax due from the taxpayer under this Ordinance; (b) apply the balance of the excess, if any, in reduction of any outstanding liability of the taxpayer to pay other taxes; and (c) refund the remainder, if any, to the taxpayer. (4) The Commissioner shall, within 2[sixty] days of receipt of a refund application under subsection (1), serve on the person applying for the refund an order in writing of the decision 3[after providing providing the taxpayer an opportunity of being heard]. 4[(5) A person aggrieved by(a) an order passed under sub-section (4); or (b) the failure of the Commissioner to pass an order under sub-section (4) within the time specified in that sub-section, may prefer an appeal under Part III of this Chapter.] 5171. Additional payment for delayed refunds. – (1) Where a refund due to a taxpayer is not paid within three months of the date on which it becomes due, the Commissioner shall pay to the taxpayer a Sub-section (1A) inserted by the Finacne Act, 2003 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TIME LIMITATION TO ISSUE REFUND ORDER. [Section 170(4)] Previously, the time limitation to pass an order u/s 170 days was 45 days. It was felt that this time limitation is too short and, therefore, section 170(4) is amended to extend the limitation to 60 days. Substituted for “forty five” vide the Finance Act, 2009. 3 Inserted by the Finance Act, 2003 4 Substituted for “(5) A person dissatisfied with a decision referred to in sub-section (4) may challenge the decision only under Part III of this Chapter.” By the Finance Act, 2003 5 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ADDITIONAL PAYMENT FOR DELAYED REFUND. [Section 171] Previously the taxpayers were entitled to compensation for delayed refund @ 6% per annum. Now by virtue of amendment made in sub-section (1) of section 171, the additional payment for delayed refund shall be made at KIBOR. Further, proviso has also been inserted which provides that where there is a reason to believe that a person has claimed refund which is not due to him, the provisions regarding payment of such additional amount shall not apply till the investigation of the claim is completed and the claim is either accepted or rejected. 1 2010 – 2011 155 The Income Tax Ordinance, 2001 further amount by way of compensation at the rate of 1[KIBOR] per annum of the amount of the refund computed for the period commencing at the end of the three month period and ending on the date on which it was paid 2[: Provided that where there is reason to believe that a person has claimed the refund which is not admissible to him, the provision regarding the payment of such additional amount shall not apply till the investigation of the claim is completed and the claim is either accepted or rejected.] (2) For the purposes of this section, a refund shall be treated as having become due – (a) in the case of a refund required to be made in consequence of an order on an appeal to the Commissioner (Appeals), an appeal to the Appellate Tribunal, a reference to the High Court or an appeal to the Supreme Court, on the date of receipt of such order by the Commissioner; 3[or] (b) in the case of a refund required to be made as a consequence of a revision order under section 4[122A], on the date the order is made by the Commissioner; or (c) in any other case, on the date the refund order is made. PART VII REPRESENTATIVES 172. Representatives.- (1) For the purposes of this Ordinance and subject to sub-sections (2) and (3), “representative” in respect of a person for a tax year, means – (a) where the person is an individual under a legal disability, the guardian or manager who receives or is entitled to receive income on behalf, or for the benefit of the individual; (b) where the person is a company (other than a trust, a Provincial Government, or 5[Local Government] in Pakistan), the principal officer of the company; (c) where the person is a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any Wakf deed which is valid under the Mussalman Wakf Validation Act, 1913 (VI of 1913)), any trustee of the trust; (d) where the person is a Provincial Government, or 6[Local Government] in Pakistan, any individual responsible for accounting for the receipt and payment of moneys or funds on behalf of the Provincial Government or 7[Local Government]; (e) where the person is an association of persons, the principal officer of the association or, in the case of a firm, any partner in the firm; (f) where the person is the Federal Government, any individual responsible for accounting for the receipt and payment of moneys or funds on behalf of the Federal Government; or (g) where the person is a public international organisation, or a foreign government or political subdivision of a foreign government, any individual responsible for accounting for the receipt and payment of moneys or funds in Pakistan on behalf of the organisation, government, or political subdivision of the government. (2) Where the Court of Wards, the Administrator General, the Official Trustee, or any receiver or manager appointed by, or under, any order of a Court receives or is entitled to receive income on behalf, or Substituted for “six per cent” vide the Finance Act, 2009 earlier it was “fifteen” substituted vide the Finance Act, 2004. Colon and proviso inserted vide the Finance Act, 2009. 3 Added by the Finance Act, 2003 4 Substituted for “135” by the Finance Act, 2003 5 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 6 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 7 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 1 2 2010 – 2011 156 The Income Tax Ordinance, 2001 for the benefit of any person, such Court of Wards, Administrator General, Official Trustee, receiver, or manager shall be the representative of the person for a tax year for the purposes of this Ordinance. (3) Subject to sub-sections (4) and (5), where a person is a non-resident person, the representative of the person for the purposes of this Ordinance for a tax year shall be any person in Pakistan – (a) who is employed by, or on behalf of, the non-resident person; (b) who has any business connection with the non-resident person; (c) from or through whom the non-resident person is in receipt of any income, whether directly or indirectly; (d) who holds, or controls the receipt or disposal of any money belonging to the non-resident person; (e) who is the trustee of the non-resident person; or (f) who is declared by the Commissioner by 1[an order] in writing to be the representative of the nonresident person. (4) A bona fide independent broker in Pakistan who, in respect of any transactions, does not deal directly with, or on behalf of, a non-resident principal but deals with, or through a non-resident broker, shall not be treated as a representative of the non-resident principal in respect of such transactions, if – (a) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and (b) the non-resident broker is carrying on such transactions in the ordinary course of its business and not as a principal. (5) No person shall be declared 2[ ]as the representative of a non-resident person unless the person has been given an opportunity by the Commissioner of being heard. 173. Liability and obligations of representatives.- (1) Every representative of a person shall be responsible for performing any duties or obligations imposed by or under this Ordinance on the person, including the payment of tax. (2) Subject to sub-section (4), any tax that, by virtue of sub-section (1), is payable by a representative of a taxpayer shall be recoverable from the representative only to the extent of any assets of the taxpayer that are in the possession or under the control of the representative. (3) Every representative of a taxpayer who pays any tax owing by the taxpayer shall be entitled to recover the amount so paid from the taxpayer or to retain the amount so paid out of any moneys of the taxpayer that are in the representative’s possession or under the representative’s control. 3[(3A) Any representative, or any person who apprehends that he may be assessed as a representative, representative, may retain out of any money payable by him to the person on whose behalf he is liable to pay tax (hereinafter in this section referred to as the "principal"), a sum equal to his estimated liability under this Ordinance, and in the event of disagreement between the principal and such a representative or a person as to the amount to be so retained, such representative or person may obtain from the Commissioner a certificate stating the amount to be so retained pending final determination of the tax liability, and the certificate so obtained shall be his authority for retaining that amount.] (4) Every representative shall be personally liable for the payment of any tax due by the representative in a representative capacity if, while the amount remains unpaid, the representative - Substituted for “notice” by the Finance Act, 2003 Words “or treated” omitted by the Finance Act, 2003 3 Sub-section (3A) inserted by the Finance Act, 2003 1 2 2010 – 2011 157 The Income Tax Ordinance, 2001 (a) alienates, charges or disposes of any moneys received or accrued in respect of which the tax is payable; or (b) disposes of or parts with any moneys or funds belonging to the taxpayer that is in the possession of the representative or which comes to the representative after the tax is payable, if such tax could legally have been paid from or out of such moneys or funds. (5) Nothing in this section shall relieve any person from performing any duties imposed by or under this Ordinance on the person which the representative of the person has failed to perform. PART VIII RECORDS, INFORMATION COLLECTION AND AUDIT 174. Records.- (1) Unless otherwise authorised by the Commissioner, every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed. (2) The Commissioner may disallow 1[or reduce] a taxpayer’s claim for a deduction if the taxpayer is unable, without reasonable 2[cause], to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction. (3) The accounts and documents required to be maintained under this section shall be maintained for 3[six] years after the end of the tax year to which they relate. 4[(4) For the purpose of this section, the expression "deduction" means any amount debited to trading account, manufacturing account, receipts and expenses account or profit and loss account.] 5[(5) The Commissioner may require any person to install and use an Electronic Tax Register of such type and description as may be prescribed for the purpose of storing and accessing information regarding any transaction that has a bearing on the tax liability of such person]6[: Provided that where any proceeding is pending before any authority or court the taxpayer shall maintain the record till final decision of the proceedings. Explanation.- Pending proceedings include proceedings for assessment or amendment of assessment, appeal, revision, reference, petition or prosecution and any proceedings before an Alternative Dispute Resolution Committee.] 175. Power to enter and search premises. (1) In order to enforce any provision of this Ordinance (including for the purpose of making an audit of a taxpayer or a survey of persons liable to tax), the Commissioner or any officer authorised in writing by the Commissioner for the purposes of this section – (a) shall, at all times and without prior notice, have full and free access to any premises, place, accounts, documents or computer; (b) may stamp, or make an extract or copy of any accounts, documents or computer-stored information to which access is obtained under clause (a); Inserted by the Finance Act, 2003 Substituted for “excuse” by the Finance Act, 2003 3 Substituted for “five” vide the Finance Act, 2010. 4 Sub-section (4) inserted by the Finance Act, 2003 5 Sub-section (5) inserted by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008INSTALLATION OF ELECTRONIC TAX REGISTER AT SELECTED SALES OUTLETS. [Section 174(5)]. To ensure correct recording of sales, the Commissioner, under subsection (5) of section 174 of the Ordinance may require any person to install Electronic Tax Registers (ETR) at selected sale outlets with known high volume business houses as decided by him. This technology is being used in a number of countries like Italy, Greece, Poland, Ukraine, Bulgaria, Finland, Malta, Serbia, Lithuania, Hungary, Turkey, Brazil etc. Income Tax Rules, 2002 have accordingly been amended to enforce the provisions of section 174. 6 Colon substituted for full stop and proviso with explanation inserted vide the Finance Act, 2010. 1 2 2010 – 2011 The Income Tax Ordinance, 2001 158 (c) may impound any accounts or documents and retain them for so long as may be necessary for examination or for the purposes of prosecution; (d) may, where a hard copy or computer disk of information stored on a computer is not made available, impound and retain the computer for as long as is necessary to copy the information required; and (e) may make an inventory of any articles found in any premises or place to which access is obtained under clause (a). 1[(2) The Commissioner may authorize any valuer or expert to enter any premises and perform any task assigned to him by the Commissioner.] (3) The occupier of any premises or place to which access is sought under sub-section (1) shall provide all reasonable facilities and assistance for the effective exercise of the right of access. (4) Any accounts, documents or computer impounded and retained under sub-section (1) shall be signed for by the Commissioner or an authorised officer. (5) A person whose accounts, documents or computer have been impounded and retained under sub-section (1) may examine them and make extracts or copies from them during regular office hours under such supervision as the Commissioner may determine. (6) Where any accounts, documents or computer impounded and retained under sub-section (1) are lost or destroyed while in the possession of the Commissioner, the Commissioner shall make reasonable compensation to the owner of the accounts, documents or computer for the loss or destruction. (7) This section shall have effect notwithstanding any rule of law relating to privilege or the public interest in relation to access to premises or places, or the production of accounts, documents or computerstored information. (8) In this section, “occupier” in relation to any premises or place, means the owner, manager or any other responsible person on the premises or place. 176. 2Notice to obtain information or evidence.- (1) The Commissioner may, by notice in writing, require any person, whether or not liable for tax under this Ordinance – (a) to furnish to the Commissioner or an authorised officer, any information relevant to any tax [leviable] under this Ordinance as specified in the notice; or (b) to attend at the time and place designated in the notice for the purpose of being examined on oath by the Commissioner or an authorised officer concerning the tax affairs of that person or any other person 1 Substituted for “(2) The Commissioner may authorise any valuer to enter any premises or place to inspect such accounts and documents as may be necessary to enable the valuer to make a valuation of an asset for the purposes of this Ordinance.” By Finacne Act, 2003 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009EMPOWERMENT OF CHARTERED ACCOUNT FIRMS FOR OBTAINING INFORMATION FOR THE PURPOSE OF INCOME TAX AUDIT. [Section 176 and 210(1)(b)] A new clause (c) has been added to section 176 of the Income Tax Ordinance, 2001 whereby a firm of Chartered Accountants appointed by the Board, has been empowered with the prior approval of Commissioners concerned to enter the business premises of the taxpayer, who has been selected for audit in order to obtain any information and examine the record kept in such premises. These powers have been granted in view of the fact that the Federal Government intends to get audit conducted in a transparent manner st and as such an MoU has been signed with ICAP which will be effective from 1 July, 2009. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. NOTICE TO OBTAIN INFORMATION. [Section 176] Previously, the Commissioner could require any person, whether or not liable to tax, to furnish information relevant to any tax “imposed” under the Ordinance. Through this amendment, the expression “imposed” has been substituted by the expression “leviable” as the expression “imposed” was being interpreted in a restrictive manner. Now the amended provisions would cover the entire tax “leviable” under the Ordinance. Furthermore, it is also provided that the person from whom information is required may opt for filing the information through the electronic media. This will facilitate the person and also improve efficiency. 3 The word “imposed” substituted by the Finance Act, 2005. 2010 – 2011 159 The Income Tax Ordinance, 2001 and, for that purpose, the Commissioner or authorised officer may require the person examined to produce any accounts, documents, or computer-stored information in the control of the person 1 [; or (c) The firm of chartered accountants, as appointed by the 2[Board or the Commissioner], to conduct audit under section 177, for any tax year, may with the prior approval of the Commissioner concerned, enter the business premises of a taxpayer, selected for audit, to obtain any information, required production of any record, on which the required information is stored and examine it within such premises; and such firm may if specifically delegated by the Commissioner, also exercise the powers as provided in sub-section (4).] (2) The Commissioner may impound any accounts or documents produced under sub-section (1) and retain them for so long as may be necessary for examination or for the purposes of prosecution. (3) [The person from whom information is required, may at his option, furnish the same electronically in any computer readable media.] Where a hard copy or computer disk of information stored on a computer is not made available as required under sub-section (1), the Commissioner may require production of the computer on which the information is stored, and impound and retain the computer for as long as is necessary to copy the information required. (4) For the purposes of this section, the Commissioner shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908 (Act V of 1908), in respect of the following matters, namely:– (a) enforcing the attendance of any person and examining the person on oath or affirmation; (b) compelling the production of any accounts, records, computer-stored information, or computer; (c) receiving evidence on affidavit; or (d) issuing commissions for the examination of witnesses. (5) This section shall have effect notwithstanding any rule of law relating to privilege or the public interest in relation to the production of accounts, documents, or computer-stored information or the giving of information. [177. Audit.- 5[(1) The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit 4 Semi-colon and word “or” substituted for full stop and clause (c) inserted vide the Finance Act, 2009. Substituted for “Board” vide the Finance Act, 2010. 3 Inserted by the Finance Act, 2005. 4 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009SELECTION OF CASES FOR AUDIT [Section 177] Previously the Board was empowered to lay down criteria for selection of person for audit. Now section 177 has been amended to empower the Board to lay down criteria also for selection of “classes of persons” for the purposes of the income tax audit. Substituted by the Finance Act, 2004. The substituted section 177 read as follows: “177. Audit.- (1) The Commissioner may select any person for an audit of the person’s income tax affairs having regard to – (a) the person’s history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter that the Commissioner considers relevant. 1A[(1A) After selection of a person for audit under sub-section (1), the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person.] 1B[(1B) After completion of the audit under sub-section (1A) or sub-section (3), the Commissioner may, if considered necessary, after obtaining taxpayer’s explanation on all the issues raised in the audit, amend the assessment under sub-section (1) or sub-section (4) of section 122, as the case may be.] (2) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits, particularly having regard to the factors in sub-section (1). (3) The Central Board of Revenue may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income tax affairs of any person and the scope of such audit shall be as determined by the Central Board of Revenue on a case by case basis. (4) Any person employed by a firm referred to in sub-section (3) may be authorised by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of 1C[conducting] an audit under that subsection.” 1A Earlier sub-section (1A) was inserted by the Finance Act, 2002. 1B Earlier sub-section (1B) was inserted by the Finance Act, 2003. 1C Earlier substituted for the words “the conduct” by the Finance Act, 2002. 5 Sub-section (1) substituted vide the Finance Act, 2010, the replaced text read as follows: 1 2 2010 – 2011 160 The Income Tax Ordinance, 2001 of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that(a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and (b) the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall not call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate.] 1[(2) After obtaining the record of a person under sub-section (1) or where necessary record is not maintained, the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person or any other person and may call for such other information and documents as he may deem appropriate.] 2[(3) (4) (5) ] (6) After completion of the audit [3], the Commissioner may, if considered necessary, after obtaining taxpayer’s explanation on all the issues raised in the audit, amend the assessment under sub-section (1) or sub-section (4) of section 122, as the case may be. (7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits,[4]. (1) The Central Board of Revenue, may lay down criteria for selection of 5[such] any person 5[or classes of persons] for an audit of person’s income tax affairs, by the Commissioner. 5 Word inserted vide the Finance Act, 2009. 5 Words inserted vide the Finance Act, 2009. 1 Sub-section (2) substituted vide the Finance Act, 2010, the replaced text read as follows: (2) The Commissioner shall select a person 1[or classes of persons] for audit in accordance with the criteria laid down by the Central Board of Revenue under sub-section (1). 1 Words inserted vide the Finance Act, 2009. 2 Sub-sections (3), (4) and (5) omitted vide the Finance Act, 2010, the omitted sub-sections with their amendment details read as follows: (3) The Central Board of Revenue shall keep the criteria confidential. (4) In addition to the selection referred to in sub-section (2), the Commissioner may also select a person 2[or classes of persons] for an audit of the person’s income tax affairs having regard to (a) the person’s history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter which in the opinion of Commissioner is material for determination of correct income. (5) 2 [After] selection of a person 2[or classes of persons] for audit under sub-section (2) or (4), the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of 2[such person or classes of persons]]. 2 Words inserted vide the Finance Act, 2009. 2 The word “after” substituted by the Finance Act, 2005. 2 Words inserted vide the Finance Act, 2009. 2 Substituted for “that person” vide the Finance Act, 2009, earlier it was substituted vide the Finance Act, 2005. 3 Words “under sub-section (5) or sub-section (8)” omitted vide the Finance Act, 2010. 4 Words “particularly having regard to the factors in sub-section (4)” omitted vide the Finance Act, 2010. 2010 – 2011 161 The Income Tax Ordinance, 2001 (8) The Federal Board of Revenue may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961) 1[or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966)], to conduct an audit of the income tax affairs of any person 2[or classes of persons[3]] and the scope of such audit shall be as determined by the Federal Board 4[or the Commissioner] of Revenue on a case to case basis. (9) Any person employed by a firm referred to in sub-section (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that sub-section.] 5[(10) Notwithstanding anything contained in sub-sections (2) and (6) where a person fails to produce before the Commissioner or a firm of Chartered Accountants or a firm of Cost and Management Accountants appointed by the Board or the Commissioner under sub-section (8) to conduct an audit, any accounts, documents and records, required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine or any other evidence that may be required by the Commissioner or the firm of Chartered Accountants or the firm of Cost and Management Accountants for the purpose of audit or determination of income and tax due thereon, the Commissioner may proceed to make best judgment assessment under section 121 of this Ordinance and the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.] 178. Assistance to Commissioner.- Every Officer of Customs, [Federal] Excise, [Sales Tax,] Provincial Excise and Taxation, District Coordination Officer, District Officers including District Officer – Revenue, the Police and the Civil Armed Forces is empowered and required to assist the Commissioner in the discharge of the Commissioner’s functions under this Ordinance. 179. Accounts, documents, records and computer-stored information not in Urdu or English language.Where any account, document, record or computer-stored information referred to in section 174, 175 or 176 is not in the Urdu or English language, the Commissioner may, by notice in writing, require the person keeping the account, document, record or computer-stored information to provide, at the person's expense, a translation into the Urdu or English language by a translator approved by the Commissioner for this purpose. 180. Power to collect information regarding exempt income.- The Federal Board of Revenue may, by notification in the official Gazette, authorise any department or agency of the Government to collect and compile any data in respect of incomes from industrial and commercial undertakings exempt from tax under this Ordinance. Words inserted vide the Finance Act, 2010. Words inserted vide the Finance Act, 2009. 3 Words “selected for audit by the Commissioner or by the Board” vide the Finance Act, 2010. 4 Words inserted vide the Finance Act, 2010. 5 Sub-section (10) inserted vide the Finance Act, 2010. 6 The word “Central” substituted by the Finance Act, 2005. 7 Inserted by the Finance Ordinance, 2002. 1 2 2010 – 2011 162 The Income Tax Ordinance, 2001 1[PART IX TAXPAYER’S REGISTRATION 181. Taxpayer’s registration.— (1) Every taxpayer shall apply in the prescribed form and in the prescribed manner for registration. (2) The Commissioner having jurisdiction over a case, where necessitated by the facts of the case, may also register a taxpayer in the prescribed manner. (3) Taxpayers’ registration scheme shall be regulated through the rules to be notified by the Board.] 2[181A. Active taxpayers’ list.- (1) The Board shall have the power to institute active taxpayers‘ list. (2) Active taxpayers‘ list shall be regulated as may be prescribed.] EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008TAXPAYER’S REGISTRATION Part IX section 181 has been substituted to provide procedure for registration of the taxpayers as against the procedure for issuance of National Tax Number Certificate provided in the original section. The substituted section 181, also requires the existing taxpayers holding NTNC as well as the new taxpayers for registration on the prescribed form and in the prescribed manner. The purpose of this registration is to use the data so provided for issuance of a Common Tax Identifier in future which will be used for all the federal taxes i.e. Income Tax, Customs duty and Sales Tax. This step has been taken to facilitate the taxpayers. The existing National Tax Number Certificate will be used till the registration certificate is issued under the new scheme, which is being issue under Income Tax Rules. Part IX substituted by the Finance Act, 2008, the replaced part read as follows: PART IX NATIONAL TAX NUMBER 1[CERTIFICATE] 181. ÐNational Tax Number 1[Certificate].- (1) Every taxpayer shall apply in the prescribed form and in the prescribed manner for a National Tax Number 1 [Certificate]. (2) An application under sub-section (1) shall be accompanied by the prescribed fee. (3) The Commissioner having jurisdiction over an applicant under sub-section (1) may after examination of all relevant documents and evidence, and after satisfying himself of the genuineness of the application, may direct issuance of the National Tax Number 1[Certificate] for a period prescribed by Commissioner 1[: Provided that the Board may in the case of individuals allow use of National Identity Card, issued by the National Database and Registration Authority, in place of National Tax Number.] 1 Substituted for “CARD” by the Finance Act, 2003 Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. CNIC TO BE USED WHERE NTN IS NOT OBTAINED. [Section 181] For the purposes of Income Tax Ordinance all taxpayers are required to hold NTN for identification. It has been decided that use of CNIC may also be prescribed, as an alternate for identification. For this purpose amendment has been made in subsection (3) of section 181 and the Board has been empowered to allow such use. 1 The word “Card” substituted by the Finance Act, 2005. 1 Substituted for “CARD” by the Finance Act, 2003 1 Substituted for “CARD” by the Finance Act, 2003 1 Colon substituted for full stop and proviso inserted by the Finance Act, 2007. 2 Section 181A inserted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 ACTIVE TAXPAYERS LIST [Section 181A]. A new section 181A has been inserted in the Income Tax Ordinance, 2001 to institute a list of taxpayers called “Active Taxpayers List” (ATL). Compliant taxpayers will be recognized by enlistment under this section. Also the noncompliant taxpayers shall be made eligible for placement on this list on completing the deficiencies in compliance requirements, as prescribed under the rules. 1 2010 – 2011 The Income Tax Ordinance, 2001 163 PART X PENALTY 1[182. Offences and penalties.—(1) Any person who commits any offence specified in column (2) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under this Ordinance or any other law, be liable to the penalty mentioned against that offence in column (3) thereof: - TABLE 1. 2. 3. 4. 5. S. No. Offences Penalties (1) (2) Where any person fails to furnish a return of income or a statement as required under section 115 or wealth statement or wealth reconciliation statement or statement under section 165 within the due date. Any person who fails to issue cash memo or invoice or receipt when required under this Ordinance or the rules made thereunder. Any person who is required to apply for registration under this Ordinance but fails to make an application for registration. Any person who fails to notify the changes of material nature in the particulars of registration. Any person who fails to deposit the amount of tax due or any part thereof in the time or manner laid down under this Ordinance or rules made thereunder. (3) Such person shall pay a penalty equal to 0.1 %of the tax payable for each day of default subject to a minimum penalty of five thousand rupees and a maximum penalty of 25% of the tax payable in respect of that tax year. Such person shall pay a penalty of five thousand rupees or three per cent of the amount of the tax involved, whichever is higher. Such person shall pay a penalty of five thousand rupees. Section of the Ordinance to which offence has reference. (4) 114, 115,116 and 165 174 and Chapter VII of the Income Tax Rules 181 Such person shall pay a penalty of five thousand rupees. 181 Such person shall pay a penalty of five per cent of the amount of the tax in default. For the second default an additional penalty of 25% of the amount of tax in default. For the third and subsequent 137 1 Section 182 substituted vide the Finance Act, 2010, the replaced text read as follows: 182. Penalty for failure to furnish a return or statement.- (1) Any person who, without reasonable excuse, fails to furnish, within the time allowed under this Ordinance, 1[return of income 1[or a statement as required under sub-section (4) of section 115 or wealth statement] for any tax year] as required under this Ordinance shall be liable for a penalty equal to one-tenth of one per cent of the tax payable for each day of default subject to a minimum penalty of five hundred rupees and a maximum penalty of twenty-five per cent of the tax payable in respect of 1[that tax year.] (2) Any person who, without reasonable excuse, fails to furnish, within the time allowed under this Ordinance, any statement required under section 165 shall be liable for a penalty of two thousand rupees. (3) Where a person liable to a penalty under sub-section (2) continues to fail to furnish the statement, the person shall be liable for an additional penalty of two hundred rupees for each day of default after the imposition of the penalty under sub-section (2). 1 Substituted for the words “any return of income” by the Finance Ordinance, 2002. 1 Inserted by the Finance Act, 2003. 1 Substituted for the words “the return” by the Finance Ordinance, 2002 2010 – 2011 6. 7. 164 Any person who repeats erroneous calculation in the return for more than one year whereby amount of tax less than the actual tax payable under this Ordinance is paid. Any person who fails to maintain records required under this Ordinance or the rules made thereunder. The Income Tax Ordinance, 2001 defaults an additional penalty of 50% of the amount of tax in default. Such person shall pay a penalty of five thousand rupees or three per cent of the amount of the tax involved, whichever is higher. 137 Such person shall pay a penalty of ten thousand rupees or five per cent of the amount of tax on income whichever is higher 174 8. Where a taxpayer who, without any reasonable cause, in non compliance with the provisions of section 177— (a) fails to produce the record or documents on receipt of first notice; (b) fails to produce the record or documents on receipt of second notice; and (c) fails to produce the record or documents on receipt of third notice. Such person shall pay a penalty of five thousand rupees; such person shall pay a penalty of ten thousand rupees; and such person shall pay a penalty of fifty thousand rupees. 177 9. Any person who fails to furnish the information required or to comply with any other term of the notice served under section 176 Any person who- Such person shall pay a penalty of five thousand rupees for the first default and ten thousand rupees for each subsequent default. Such person shall pay a penalty of twenty five thousand rupees or 100% of the amount of tax shortfall whichever is higher: Provided that in case of an assessment order deemed under section 120, no penalty shall be imposed to the extent of the tax shortfall occurring as a result of the taxpayer taking a reasonably arguable position on the application of this Ordinance to the taxpayer‘s position. 176 10. (a) makes a false or misleading statement to an Inland Revenue Authority either in writing or orally or electronically including a statement in an application, certificate, declaration, notification, return, objection or other document including books of accounts made ,prepared, given, filed or furnished under this ordinance; (b) furnishes or files a false or misleading information or document or statement to an Income tax Authority either in writing or orally or electronically; (c) omits from a statement 114,115,116,1 74,176, 177 and general. 2010 – 2011 11. 12. 13. 14. 15. 165 made or information furnished to an Income tax Authority any matter or thing without which the statement or the information is false or misleading in a material particular. Any person who denies or obstructs the access of the Commissioner or any officer authorized by the Commissioner to the premises, place, accounts, documents, computers or stocks. Where a person has concealed income or furnished inaccurate particulars of such income, including but not limited to the suppression of any income or amount chargeable to tax, the claiming of any deduction for any expenditure not actually incurred or any act referred to in sub-section (1) of section 111, in the course of any proceeding under this Ordinance before any Income tax authority or the appellate tribunal. The Income Tax Ordinance, 2001 Such person shall pay a penalty of twenty five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher. 175 and177 Such person shall pay a penalty of twenty five thousand rupees or an amount equal to the tax which the person sought to evade whichever is higher. However, no penalty shall be payable on mere disallowance of a claim of exemption from tax of any income or amount declared by a person or mere disallowance of any expenditure declared by a person to be deductible, unless it is proved that the person made the claim knowing it to be wrong. 20, 111 and General. Any person who obstructs any Income tax Authority in the performance of his official duties. Any person who contravenes any of the provision of this Ordinance for which no penalty has, specifically, been provided in this section. Such person shall pay a penalty of twenty five thousand rupees. 209, 210 and General. Such person shall pay a penalty of five thousand rupees or three per cent of the amount of tax involved, whichever is higher. General. Any person who fails to collect or deduct tax as required under any provision of this Ordinance or fails to pay the tax collected or deducted as required under section 160. Such person shall pay a penalty of twenty five thousand rupees or the 10% of the amount of tax whichever is higher. 148,149,150,1 51,152, 153, 153A, 154, 155, 156, 156A, 156B, 158, 160, 231A, 231B, 233, 233A, 234, 234A, 235, 236, 236A. (2) The penalties specified under sub-section (1) shall be applied in a consistent manner and no penalty shall be payable unless an order in writing is passed by the Commissioner, Commissioner (Appeals) or the Appellate Tribunal after providing an opportunity of being heard to the person concerned. 2010 – 2011 166 The Income Tax Ordinance, 2001 (3) Where a Commissioner (Appeals) or the Appellate Tribunal makes an order under sub-section (2), the Commissioner (Appeals) or the Appellate Tribunal, as the case may be, shall immediately serve a copy of the order on the Commissioner and thereupon all the provision of this Ordinance relating to the recovery of penalty shall apply as if the order was made by the Commissioner. (4) Where in consequence of any order under this Ordinance, the amount of tax in respect of which any penalty payable under sub-section (1) is reduced, the amount of penalty shall be reduced accordingly.] 1[183. Exemption from penalty and default surcharge.- The Federal Government may, by notification in the official Gazette, or the Board by an order published in the official Gazette for reasons to be recorded in writing, exempt any person or class of persons from payment of the whole or part of the penalty and default surcharge payable under this Ordinance subject to such conditions and limitations as may be specified in such notification or, as the case may be, order.] [184.] 2 [185. ]3 [186.]1 1 Section 183 substituted vide the Finance Act, 2010, the replaced text read as follows: 183. Penalty for non-payment of tax.- (1) A taxpayer who fails to pay any tax (other than penalty 1[imposed under this section]) due under this Ordinance by the due date shall be liable for a penalty equal to – (a) in the case of the first default, five per cent of the amount of tax in default; (b) in the case of a second default, an additional penalty of twenty per cent of the amount of tax in default; (c) in the case of a third default, an additional penalty of twenty-five per cent of the amount of tax in default; and (d) in the case of a fourth and subsequent default, an additional penalty of up to fifty per cent of the amount of tax in default as determined by the Commissioner, but the total penalty in respect of the amount of tax in default shall not exceed one hundred per cent of such amount of tax. (2) Where, in consequence of any order under this Ordinance, the amount of tax in respect of which any penalty imposed under sub-section (1) is reduced, the amount of the penalty shall be reduced accordingly. 1 Inserted by the Finance Act, 2003 2 Section 184 omitted vide the Finance Act, 2010, the omitted text read as follows: 2184. Penalty for concealment of income.- (1) Where, in the course of any proceedings under this Ordinance, the Commissioner, Commissioner (Appeals), or the Appellate Tribunal is satisfied that any person has 2[either in the said proceedings or in any earlier proceedings relating to an assessment in respect of the same tax year] concealed income or furnished inaccurate particulars of such income, the Commissioner, Commissioner (Appeals), or the Appellate Tribunal, as the case may be, may, by an order in writing, impose upon the person a penalty equal to the amount of tax which the person sought to evade by concealment of income or the furnishing of inaccurate particulars of such income. (2) For the purposes of sub-section (1), concealment of income or the furnishing of inaccurate particulars of income shall include – (a) the suppression of any income or amount chargeable to tax; (b) the claiming of any deduction for any expenditure not actually incurred; or (c) any act referred to in sub-section (1) of section 111. (3) Where any income or amount declared by a taxpayer is claimed by the taxpayer to be exempt from tax or any expenditure declared by a taxpayer is claimed by the taxpayer to be deductible, the mere disallowance of such claim shall not constitute concealment of income or the furnishing of inaccurate particulars of income, unless it is proved that the taxpayer made the claim knowing it to be wrong. (4) Where a Commissioner (Appeals) or the Appellate Tribunal makes an order under sub-section (1), the 2[Commissioner (Appeals) or the Appellate Tribunal,] as the case may be, shall immediately serve a copy of the order on the Commissioner and thereupon all the provisions of this Ordinance relating to the recovery of penalty shall apply as if the order were made by the Commissioner. 2[(5) Where, in consequence of any order under this Ordinance, the amount of tax in respect of which any penalty imposed under sub-section (1) is reduced, the amount of the penalty shall be reduced accordingly.] 2 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008CONSEQUENTIAL RELIEF IN THE AMOUNT OF PENALTY IMPOSED FOR CONCEALMENT OF INCOME. (Section 184). Under section 184 of the Ordinance, the income tax authorities are empowered to impose penalty upon a person equal to the amount of tax which the person sought to evade by concealment of income. In some cases the appellate authorities reduce the quantum of concealed income resulting into reduction of tax on such income. However, no provision for consequential relief in the quantum of penalty was available in the Ordinance. So, a new sub-section (5) has been inserted to allow consequential, proportionate reduction in amount of penalty to taxpayers as a result of appellate decision, if required. 2 Inserted by the Finance Act, 2003. 2 Substituted for the words “Commissioner or Tribunal” by the Finance Ordinance, 2002. 3 Section 185 omitted vide the Finance Act, 2010, the omitted text read as follows: Penalty for failure to maintain records.- A person who, without reasonable excuse, fails to maintain records as required under this Ordinance shall be liable for a penalty equal to – (a) in the case of the first failure, two thousand rupees; (b) in the case of a second failure, five thousand rupees; and (c) in the case of a third and subsequent failure, ten thousand rupees. 2010 – 2011 167 The Income Tax Ordinance, 2001 [187.]2 [188.]3 [189.]4 [190.]5 1 Section 186 omitted vide the Finance Act, 2010, the omitted text read as follows: Penalty for non-compliance with notice.- (1) A person who, without reasonable excuse, fails to comply with any notice served on the person under section 116 or 176 shall be liable for a penalty equal to – (a) in the case of the first failure, two thousand rupees; (b) in the case of a second failure, five thousand rupees; or (c) in the case of a third and subsequent failure, ten thousand rupees. (2) Where a person liable for a penalty under sub-section (1) has an assessed tax liability for the tax year in which the failure occurred of less than twenty thousand rupees, the amount of the penalty imposed under sub-section (1) shall be reduced by seventyfive percent. 2 Section 187 omitted vide the Finance Act, 2010, the omitted text read as follows: Penalty for making false or misleading statements.- (1) Where a person – (a) makes a statement to 2[an income tax authority] that is false or misleading in a material particular or omits from a statement made to 2[an income tax authority] any matter or thing without which the statement is false or misleading in a material particular; and (b) the tax liability (including the liability for advance tax under section 147) of the person computed on the basis of the statement is less than it would have been if the statement had not been false or misleading (the difference hereinafter referred to as the “tax shortfall”), the person shall be liable for a penalty equal to – (i) where the statement or omission was made knowingly or recklessly, two hundred per cent of the tax shortfall; or (ii) in any other case (other than where sub-section (2) applies), twenty-five per cent of the tax shortfall. (2) In the case of an assessment order under section 120, no penalty shall be imposed under sub-section (1) to the extent to which the tax shortfall arose as a result of the taxpayer taking a reasonably arguable position on the application of this Ordinance to the taxpayer’s position. (3) A reference in this section to a statement made to 2[an income tax authority] is a reference to a statement made in writing or orally to that 2[authority] acting in the performance of the 2[authority’s] duties under this Ordinance, and shall include a statement made (a) in an application, certificate, declaration, notification, return, objection or other document made, prepared, given, filed or furnished under this Ordinance; (b) in information required to be furnished under this Ordinance; (c) in a document furnished to 2[an income tax authority] otherwise than pursuant to this Ordinance; (d) in answer to a question asked of a person by 2[an income tax authority;] or (e) to another person with the knowledge or reasonable expectation that the statement would be conveyed to 2[an income tax authority.] 2 Substituted for the words “a taxation officer” by the Finance Ordinance, 2002. 2 Substituted for the words “a taxation officer” by the Finance Ordinance, 2002. 2 Substituted for the words “a taxation officer” by the Finance Ordinance, 2002. 2 Substituted for the words “officer” by the Finance Ordinance, 2002 2 Substituted for the words “officer’s” by the Finance Ordinance, 2002. 2 Substituted for the words “a taxation officer” by the Finance Ordinance, 2002. 2 Substituted for the words “a taxation officer” by the Finance Ordinance, 2002. 2 Substituted for the words “a taxation officer” by the Finance Ordinance, 2002. 3 Section 188 omitted vide the Finance Act, 2010, the omitted text read as follows: Penalty for failure to give notice.- (1) Where a person fails to give notice of the discontinuance of the person’s business as required under section 3[117], the Commissioner may impose a penalty on the person not exceeding the amount of tax payable by the person for the tax year in which the business was discontinued. (2) Where a person fails to give notice of the person’s appointment as liquidator as required under section 141, the Commissioner may impose a penalty on the person not exceeding ten thousand rupees. 3 Substituted for “124” by the Finance Act, 2003. 4 Section 189 omitted vide the Finance Act, 2010, the omitted text read as follows: Penalty for obstruction.- Where any person obstructs the Commissioner or a taxation officer in discharge of the Commissioner or officer’s functions under this Ordinance, the Commissioner may impose a penalty on the person not exceeding ten thousand rupees. 5 Section 190 omitted vide the Finance Act, 2010, the omitted text read as follows: Imposition of penalty.- (1) No penalty may be imposed under this Part on any person unless the person is given a reasonable opportunity of being heard. (2) Subject to sub-section (3), the imposition of a penalty under this Part shall be without prejudice to any other liability incurred by the person under this Ordinance. (3) The imposition of a penalty in relation to an act or omission shall be an alternative to prosecution under Part XI of this Chapter. (4) If a penalty has been paid under this Part and the Commissioner institutes a prosecution proceeding under Part XI of this Chapter in respect of the same act or omission, the Commissioner shall refund the amount of penalty paid, and the penalty shall not be payable unless the prosecution is withdrawn. 5[(5) A penalty under sections 182, 183, 185, 186 and 187 shall be imposed by the Commissioner.] (6) The provisions of Parts III and IV of this Chapter shall apply to an assessment of penalty as if it were an assessment of tax. 2010 – 2011 168 The Income Tax Ordinance, 2001 PART XI OFFENCES AND PROSECUTIONS 1191. Prosecution for non-compliance with certain statutory obligations.- (1) Any person who, without reasonable excuse, fails to – 2[(a) comply with a notice under sub-section (3) of section 114 or sub-section (1) of section 116;] (b) pay advance tax as required under section 147; (c) comply with the obligation under Part V of this Chapter to collect or deduct tax and pay the tax to the Commissioner; (d) comply with a notice served under section 140 or 176; (e) comply with the requirements of 3[sub-section (3) or sub-section (4)] of section 141; or (f) provide reasonable facilities and assistance as required under sub-section (3) of section 175, shall commit an offence punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both. (2) If a person convicted of an offence under clause (a) of sub-section (1) fails, without reasonable excuse, to furnish the return of income or wealth statement to which the offence relates within the period specified by the Court, the person shall commit a further offence punishable on conviction with a fine 4[not exceeding fifty thousand rupees] or imprisonment for a term not exceeding two years, or both. 192. Prosecution for false statement in verification.- Any person who makes a statement in any verification in any return or other document furnished under this Ordinance which is false and which the person knows or believes to be false, or does not believe to be true, the person shall commit an offence punishable on conviction with a fine 5[upto hundred thousand rupees] or imprisonment for a term not exceeding three years, or both. 6[192A. Prosecution for concealment of income.- (1) Where, in the course of any proceedings under this Ordinance, any person has either in the said proceedings or in any earlier proceedings concealed income or furnished inaccurate particulars of such income and revenue impact of such concealment or furnishing of 5 Substituted for “(5) The Commissioner shall make an assessment of any penalty imposed under this Part in accordance with the provisions of Part II of this Chapter as if the penalty were tax.” By the Finance Act, 2003 1 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009PROSECUTION FOR NON-COMPLIANCE WITH CERTAIN STATUTORY OBLIGATIONS. [Section191 & 192] 42.1 Section 191 lists offences where a person shall be treated as punishable on conviction with a fine or imprisonment for a term not exceeding one year or both. However, the quantum of fine was not provided. Now by virtue of amendment made through Finance Act, 2009, the court is empowered to impose a fine not exceeding Rs. 50,000/-. 42.2 Similarly as a result of amendment made in section 192, the amount of fine upto 100,000/- has been notified in case a person is convicted for making false statement in verification. 2 Substituted for “(a) furnish a return of income as required under section 114 or a wealth statement as required under section 116;” by the finance Act, 2003 3 Inserted by the Finance Act, 2003 4 Words added vide the Finance Act, 2009. 5 Words added vide the Finance Act, 2009. 6 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009PROSECUTION FOR CONCEALMENT OF INCOME. [Section 192A] 43.1 In order to overcome the menace of concealment of income by the taxpayers, a new section 192A has been inserted which provides that where a person in any proceedings or in any earlier proceedings concealed income or furnished inaccurate particulars of such income and the revenue impact of such concealment or furnishing of inaccurate particulars of such income is five hundred thousand rupees or more shall be treated as committing an offence punishable on conviction with imprisonment upto two years or with fine or both. 43.2 For the purpose of this section concealment of income or the furnishing of inaccurate particulars has been defined to include: a) the suppression of any income or amount chargeable to tax. b) the claiming of any deduction for any expenditure not actually incurred; or c) any act referred to in sub-section (1) of section 111. Section 192A inserted vide the Finance Act, 2009. 2010 – 2011 169 The Income Tax Ordinance, 2001 inaccurate particulars of such income is five hundred thousand rupees or more shall commit an offence punishable on conviction with imprisonment upto two years or with fine or both. (2) For the purposes of sub-section (1), concealment of income or the furnishing of inaccurate particulars of income shall include (a) the suppression of any income or amount chargeable to tax; (b) the claiming of any deduction for any expenditure not actually incurred; or (c) any act referred to in sub-section (1) of section 111.] 193. Prosecution for failure to maintain records. A person who fails to maintain records as required under this Ordinance shall commit an offence punishable on conviction with – (a) where the failure was deliberate, a fine 1[not exceeding fifty thousand rupees] or imprisonment for a term not exceeding two years, or both; or (b) in any other case, a fine 2[not exceeding fifty thousand rupees]. 194. Prosecution for improper use of National Tax Number 3[Certificate].- A person who knowingly or recklessly uses a false National Tax Number 4[Certificate] including the National Tax Number 5[Certificate] 5[Certificate] of another person on a return or other document prescribed or used for the purposes of this Ordinance shall commit an offence punishable with a fine 6[not exceeding fifty thousand rupees] or imprisonment for a term not exceeding two years, or both. 195. Prosecution for making false or misleading statements.- (1) A person who – (a) makes a statement to 7[an income tax authority] that is false or misleading in a material particular; or (b) omits from a statement made to 8[an income tax authority] any matter or thing without which the statement is misleading in a material particular, shall commit an offence punishable on conviction – (i) where the statement or omission was made knowingly or recklessly, with a fine or imprisonment for a term not exceeding two years, or both; or (ii) in any other case, with a fine. (2) A person shall not commit an offence under sub-section (1) if the person did not know and could not reasonably be expected to have known that the statement to which the prosecution relates was false or misleading. (3) Sub-section (3) of section 187 shall apply in determining whether a person has made a statement to 9[an Income Tax Authority]. 1 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009FIXATION OF PENALTY LIMIT FOR PROSECUTION FOR NON-MAINTENANCE OF RECORD AND IMPROPER USE OF NTN. [Section 193 and 194] Amendment has been made in sections 193 and 194 to fix the limit of fine upto Rs. 50,000/- in case of prosecution for failure to maintain records and improper use of N.T.N. Words added vide the Finance Act, 2009. 2 Words inserted by the Finance Act, 2008. 3 The word “Card” substituted by the Finance Act, 2005. 4 The word “Card” substituted by the Finance Act, 2005. 5 The word “Card” substituted by the Finance Act, 2005. 6 Words added vide the Finance Act, 2009. 7 Substituted for the words “a taxation officer “ by the Finance Ordinance, 2002. 8 Substituted for the words “a taxation officer “ by the Finance Ordinance, 2002. 9 Substituted for “a taxation officer” by the Finance Act, 2003 2010 – 2011 170 The Income Tax Ordinance, 2001 196. Prosecution for obstructing 1[an income tax authority.-] A person who obstructs 2[an income tax authority] in discharge of functions under this Ordinance shall commit an offence punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both. 197. Prosecution for disposal of property to prevent attachment.- Where the owner of any property, or a person acting on the owner’s behalf or claiming under the owner, sells, mortgages, charges, leases or otherwise deals with the property after the receipt of a notice from the Commissioner with a view to preventing the Commissioner from attaching it, shall commit an offence punishable on conviction with a fine 3[upto hundred thousand rupees] or imprisonment for a term not exceeding three years, or both. 198. Prosecution for unauthorised disclosure of information by a public servant.- A person who discloses any particulars in contravention of section 216 shall commit an offence punishable on conviction with a fine or imprisonment for a term not exceeding six months, or both. 199. Prosecution for abetment.- Where a person 4[knowingly and wilfully] aids, abets, assists, incites or induces another person to commit an offence under this Ordinance, the first-mentioned person shall commit an offence punishable on conviction with a fine or imprisonment for a term not exceeding three years, or both. 200. Offences by companies and associations of persons.- (1) Where an offence under this Part is committed by a company, every person who, at the time the offence was committed, was – (a) the principal officer, a director, general manager, company secretary or other similar officer of the company; or (b) acting or purporting to act in that capacity, shall be, notwithstanding anything contained in any other law, guilty of the offence and all the provisions of this Ordinance shall apply accordingly. (2) Where an offence under this Part is committed by an association of persons, every person who, at the time the offence was committed, was a member of the association shall be, notwithstanding anything contained in any other law, guilty of the offence and all the provisions of this Ordinance shall apply accordingly. (3) Sub-sections (1) and (2) shall not apply to a person where – (a) the offence was committed without the person’s consent or knowledge; and (b) the person has exercised all diligence to prevent the commission of the offence as ought to have been exercised having regard to the nature of the person’s functions and all the circumstances. 201. Institution of prosecution proceedings without prejudice to other action.- Notwithstanding anything contained in any law for the time being in force, a prosecution for an offence against this Ordinance may be instituted without prejudice to any other liability incurred by any person under this Ordinance. 5[202. Power to compound offences.- Notwithstanding any provisions of this Ordinance, where any person has committed any offence, the Director General may, with the prior approval of the Board, either Substituted for the words “a taxation officer “ by the Finance Ordinance, 2002. Substituted for the words “a taxation officer “ by the Finance Ordinance, 2002. 3 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009IMPOSITION OF PENALTY FOR CONVICTION IN PROSECUTION PROCEEDINGS RELATING TO DISPOSAL OF PROPERTY TO PREVENT ATTACHMENT. [Section 197] Under section 197 a person is punishable on conviction with a fine or imprisonment or both in the matters relating to disposal of property after the receipt of the notice from the Commissioner, so as to prevent attachment of property. As a result of amendment the court is now empowered to impose a fine upto Rs. 100,000/- as previously no limit of fine was specified. Words added vide the Finance Act, 2009. 4 Inserted by the Finance Act, 2003 5 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 20091 2 2010 – 2011 171 The Income Tax Ordinance, 2001 before or after the institution of proceedings, compound such offence subject to payment of tax due along with 1[default surcharge] and penalty as is determined under the provisions of this Ordinance.] 203. Trial by Special Judge.- 2[(1) The Federal Government may, by notification in the official Gazette, appoint as many special judges as it may consider necessary, and where it appoints more than one Special Judge, it shall specify in the notification the territorial limits within which each of them shall exercise jurisdiction.] 3[(1A) A Special Judge shall be a person who is or has been a Sessions Judge and shall, on appointment, have the jurisdiction to try exclusively an offence punishable under this Part other than an offence referred to in section 198. (1B) The provisions of the Code of Criminal Procedure, 1898 (Act V of 1898), except those of Chapter XXXVIII, thereof shall apply to the proceedings of the court of a Special Judge and, for the purposes of the said provisions, the court of Special Judge shall be deemed to be a Court of Sessions trying cases, and a person conducting prosecution before the court of a Special Judge shall be deemed to be a Public Prosecutor.] (2) A Special Judge shall take cognisance of, and have jurisdiction to try, an offence triable under sub-section (1) only upon a complaint in writing made by the Commissioner. 4[(3) The Federal Government may, by order in writing, direct the transfer, at any stage of the trial, of any case from the court of one Special Judge to the court of another Special Judge for disposal, whenever it appears to the Federal Government that such transfer shall promote the ends of justice or tend to the general convenience of parties or witnesses. (4) In respect of a case transferred to a Special Judge by virtue of sub-section (1) or under sub-section (3), such Judge shall not, by reason of the said transfer, be bound to recall and record again any witness who has given evidence in the case before the transfer and may act on the evidence already recorded by or produced before the court which tried the case before the transfer.] [203A. Appeal against the order of a Special Judge.- An appeal against the order of a Special Judge shall lie to the respective High Court of a province within thirty days of the passing of the order and it shall be heard as an appeal under the Code of Criminal Procedure 1898 (Act V of 1898) by a single Judge of the High Court.] 204. Power to tender immunity from prosecution.- (1) The Federal Government may, for the purpose of obtaining the evidence of any person appearing to have been directly or indirectly concerned in, or privy to the concealment of income or to the evasion of tax, tender to such person immunity from prosecution for any offence under this Ordinance or under the Pakistan Penal Code (Act XLV of 1860), or under any other Federal Law on condition of the person making full and true disclosure of the whole circumstances relating to the concealment of income or evasion of tax. (2) A tender of immunity made to, and accepted by, the person concerned shall render the person immune from prosecution for any offence in respect of which the tender was made and to the extent specified in the immunity. POWER TO COMPOUND OFFENCES. [Section 202] Section 202 has been substituted to empower the Director General of Income Tax with the prior approval of Board, instead of Commissioner, to compound offence subject to payment of tax alongwith additional tax and penalty to be determined under the provisions of the Ordinance. Section 202 substituted vide the Finance Act, 2009, the replaced section read as follows: 202. Power to compound offences.- Where any person has committed any offence under this Part, the Commissioner may either before or after the institution of proceedings, compound such offence and order that such person pay the amount for which the offence may be compounded. 1 Substituted for “additional tax” vide the Finance Act, 2010. 2 Sub-section (1) substituted vide the Finance Act, 2010, the replaced text read as follows: (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1898 (Act V of 1898) or in any other law, an offence punishable under this Part (other than an offence referred to in section 198) shall be tried exclusively by a Special Judge appointed by the Federal Government under the Pakistan Criminal Law (Amendment) Act, 1958 (XL of 1958), as if such offence were an offence specified in the Schedule to that Act. 3 Sub-sections (1A) and (1B) inserted vide the Finance Act, 2010. 4 Sub-sections (3) and (4) inserted vide the Finance Act, 2010. 2010 – 2011 172 The Income Tax Ordinance, 2001 (3) If it appears to the Federal Government that any person to whom immunity has been tendered under this section has not complied with the conditions on which the tender was made or is concealing anything or giving false evidence, the Federal Government may withdraw the immunity, and any such person may be tried for the offence in respect of which the tender of immunity was made or for any other offence of which the person appears to have been guilty in connection with the same matter. PART XII SURCHARGE] 1[DEFAULT 205. 2[Default Surcharge].- (1) A person who fails to pay – 3[(a) any tax, excluding the advance tax under section 147 and 4[default surcharge] under this section;] (b) any penalty; or (c) any amount referred to in section 140 or 141, on or before the due date for payment shall be liable for 5[default surcharge] at a rate equal to 6[KIBOR plus plus three per cent per quarter] on the tax, penalty or other amount unpaid computed for the period commencing on the date on which the tax, penalty or other amount was due and ending on the date on which it was paid. 7[(1A) a person who fails to pay advance tax under section 147 shall be liable for 8[default surcharge] at surcharge] at a rate equal to 9[KIBOR plus three per cent per quarter] on the amount of tax unpaid computed for the period commencing on the date on which it was due and ending on the date on which it was paid or date on which the return of income for the relevant tax year was due, whichever is earlier.] 10[(1B) Where, in respect of any tax year, any taxpayer fails to pay tax under sub-section 11[(4A) or] (6) of section 147 or the tax so paid is less than 12[ninety] per cent of the tax chargeable for the relevant tax year, he shall be liable to pay 13[default surcharge] at the rate of 14[KIBOR plus three per cent per quarter] on the amount of tax so chargeable or the amount by which the tax paid by him falls short of the 15[ninety] per cent, as the case may be; and such additional tax shall be calculated from the first day of April in that year to the date on which assessment is made or the thirtieth day of June of the financial year next following, whichever is the earlier.] (2) Any 16[default surcharge] paid by a person under sub-section (1) shall be refunded to the extent that the tax, penalty or other amount to which it relates is held not to be payable. Substituted for “ADDITIONAL TAX” vide the Finance Act, 2010. Substituted for “additional tax” vide the Finance Act, 2010. 3 Substituted for “(a) any tax, including any advance payment of tax under section 147;” by Finance Act, 2003 4 Substituted for “additional tax” vide the Finance Act, 2010. 5 Substituted for “additional tax” vide the Finance Act, 2010. 6 Substituted for “twelve per cent per annum” vide the Finance Act, 2009 earlier it was “eighteen%” vide the Finance Act, 2004. 7 Sub-section (1A) inserted by the Finance Act, 2003 8 Substituted for “additional tax” vide the Finance Act, 2010. 9 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ADDITIONAL TAX FOR DELAYED PAYMENTS. [Section 205] Previously a person who failed to pay any tax or penalty etc. was liable to pay additional tax @ 12% per annum of the tax not paid. After amendment, now the additional tax is to be levied at KIBOR plus 3%. Substituted for “eighteen(/twelve as FA09) per cent per annum” vide the Finance Act, 2009. 10 Inserted by the Finance Act, 2004. 11 Brackets, figure, letter and word inserted by the Finance Act, 2006. 12 Substituted for “eighty” by the Finance Act, 2006. 13 Substituted for “additional tax” vide the Finance Act, 2010. 14 Substituted for “twelve per cent per annum” vide the Finance Act, 2009. 15 Substituted for “eighty” by the Finance Act, 2006. 16 Substituted for “additional tax” vide the Finance Act, 2010. 1 2 2010 – 2011 173 The Income Tax Ordinance, 2001 (3) A person who fails to 1[collect tax, as required under Division II of Part V of this Chapter or Chapter XII or deduct tax as required under Division III of Part V of this Chapter or Chapter XII or fails to] pay an amount of tax collected or deducted as required under section 160 on or before the due date for payment shall be liable for 2[default surcharge] at a rate equal to 3[KIBOR plus three per cent per quarter] on the amount unpaid computed for the period commencing on the date the amount was required to be collected or deducted and ending on the date on which it was paid to the Commissioner. 4[(4)] (5) The Commissioner shall make an assessment of any 5[default surcharge] imposed under this Part in accordance with the provisions of Part II of this Chapter as if the additional tax were tax. (6) The provisions of Parts III and IV apply to an assessment of 6[default surcharge] as if it were an assessment of tax. 7[205A. Reduction in 8[default surcharge], consequential to reduction in tax or penalty.- Where, in consequence of any order made under this Ordinance, the amount of tax or penalty in respect of which 9[default surcharge] is chargeable under section 205 is reduced, the 10[default surcharge], if any, levied under the aforesaid section shall be reduced accordingly.] PART XIII CIRCULARS (206. Circulars.- (1) To achieve consistency in the administration of this Ordinance and to provide guidance to taxpayers and officers of the Federal Board of Revenue, the Federal Board of Revenue may issue Circulars setting out the Board’s interpretation of this Ordinance. [(2) A circular issued by the Federal Board of Revenue shall be binding on all Income Tax Authorities and other persons employed in the execution of the Ordinance, under the control of the said Board other than Commissioners of Income Tax (Appeals).] (3) A Circular shall not [be] binding on a taxpayer. [206A. Advance ruling.- (1) The Federal Board of Revenue may, on application in writing by a nonresident taxpayer, issue to the taxpayer an advance ruling setting out the Commissioner's position regarding the application of this Ordinance to a transaction proposed or entered into by the taxpayer. (2) Where the taxpayer has made a full and true disclosure of the nature of all aspects of the transaction relevant to the ruling and the transaction has proceeded in all material respects as described in Inserted by the Finance Act, 2003 Substituted for “additional tax” vide the Finance Act, 2010. 3 Substituted for “eighteen(/twelve as FA09) per cent per annum” vide the Finance Act, 2009. 4 Sub-section (4) omitted by the Finance Act, 2003 read as follows: “(4) Additional tax imposed under sub-section (3) shall be borne personally by the person obliged to collect or deduct the tax, and no part shall be recoverable from the taxpayer.” 5 Substituted for “additional tax” vide the Finance Act, 2010. 6 Substituted for “additional tax” vide the Finance Act, 2010. 7 Section 205A. inserted by the Finance Act, 2003 8 Substituted for “additional tax” vide the Finance Act, 2010. 9 Substituted for “additional tax” vide the Finance Act, 2010. 10 Substituted for “additional tax” vide the Finance Act, 2010. Â Income Tax Cir. No. 1 dated the 1st July, 2006 CIRCULAR OF CBR IS BINDING ON OFFICERS. [Section 206]. Sub-section (2) of section 206 has been re-written to reiterate, in line with the directions contained in the judgments of the superior courts, that circular issued by the CBR shall be binding on all income tax authorities and other persons employed in the execution of the order under the control of the Board other than CIT (Appeals). 11 Sub-section (2) substituted by the Finance Act, 2006. The old sub-section read as follows: (2) A Circular shall be binding on the Central Board of Revenue, other than the Commissioner (Appeals). 12 Inserted by the Finance Ordinance, 2002. 13 Section 206A inserted by the Finance Act, 2003 1 2 2010 – 2011 174 The Income Tax Ordinance, 2001 the taxpayer's application for the ruling, the ruling is [binding] on the Commissioner with respect to the application to the transaction of the law as it stood at the time the ruling was issued. (3) Where there is any inconsistency between a circular and an advance ruling, priority shall be given to the terms of the advance ruling.] CHAPTER XI ADMINISTRATION PART I GENERAL 2[207. Income tax authorities.- (1) There shall be the following Income Tax authorities for the purposes of this Ordinance and rules made thereunder, namely:(a) Board; (b) Chief Commissioner Inland Revenue; (c) Commissioner Inland Revenue; (d) Commissioner Inland Revenue (Appeals); (e) Additional Commissioner Inland Revenue; (f) Deputy Commissioner Inland Revenue; (g) Assistant Commissioner Inland Revenue; (h) Inland Revenue Officer; (i) Inland Revenue Audit Officer; (j) Superintendent Inland Revenue; (k) Inspector Inland Revenue; and (l) Auditor Inland Revenue. (2) The Board shall examine, supervise and oversee the general administration of this Ordinance. The word “blinding” substituted by the Finance Act, 2005. Section 207 substituted vide the Finance Act, 2010, the replaced text read as follows: 2[207.Income tax authorities.- (1) There shall be the following income tax authorities for the purposes of this Ordinance, namely:(a) Federal Board of Revenue; (b) Regional Commissioners of Income Tax; (c) Commissioners of Income Tax; (d) Commissioners of Income Tax (Appeals); and (e) taxation officers. (2) The Federal Board of Revenue shall exercise the general administration of this Ordinance. (3) The Regional Commissioners of Income Tax and the Commissioners of Income Tax (Appeals) shall be subordinate to the Federal Board of Revenue and the Commissioners of Income Tax shall be subordinate to the Regional Commissioners. (4) Subject to sub-section (5), the taxation officers shall be subordinate to the Commissioners of Income Tax. (5) A taxation officer invested with the powers and functions of the Commissioner, under sub-section (2) of section 209, shall be subordinate to the Regional Commissioner of Income Tax.] 2 Substituted for “additional tax” vide the Finance Act, 2010. 2 Substituted by the Finance Ordinance, 2002. The original section 207 read as follows: “207.Income tax authorities.- (1) There shall be the following income tax authorities for the purposes of this Ordinance, namely:(a) the Central Board of Revenue; (b) Regional Commissioners of Income Tax; and (c) Commissioners of Income Tax. (2) The Commissioners of Income Tax shall be subordinate to the Regional Commissioners of Income Tax within whose jurisdiction they perform their functions.” 1 2 2010 – 2011 175 The Income Tax Ordinance, 2001 (3) The Chief Commissioners Inland Revenue and Commissioners Inland Revenue (Appeals) shall be subordinate to the Board and Commissioners Inland Revenue, shall be subordinate to the Chief Commissioner Inland Revenue. (4) Subject to sub-section (5), Additional Commissioners Inland Revenue, Deputy Commissioners Inland Revenue, Assistant Commissioners Inland Revenue, Inland Revenue Officers, Inland Revenue Audit Officers, Superintendents Inland Revenue, Auditors Inland Revenue and Inspectors Inland Revenue shall be subordinate to the Commissioners Inland Revenue. (4A) Deputy Commissioners Inland Revenue, Assistant Commissioners Inland Revenue, Inland Revenue Officers, Inland Revenue Audit Officers, Superintendents Inland Revenue, Auditors Inland Revenue and Inspectors Inland Revenue shall be subordinate to the Additional Commissioners Inland Revenue. (5) An officer vested with the powers and functions of Commissioner shall be subordinate to the Chief Commissioner Inland Revenue.] 1[208. Appointment of income tax authorities.- 2[(1) The Board may appoint as many Chief Commissioners Inland Revenue, Commissioners Inland Revenue, Commissioners Inland Revenue (Appeals), Additional Commissioners Inland Revenue, Deputy Commissioners Inland Revenue, Assistant Commissioners Inland Revenue, Inland Revenue Officers, Inland Revenue Audit Officers, Superintendents Inland Revenue, Inspectors Inland Revenue, Auditors Inland Revenue and such other executive or ministerial officers and staff as may be necessary.] (2) Subject to such orders or directions as may be issued by the Federal Board of Revenue, any income tax authority may appoint any income tax authority subordinate to it and such other executive or ministerial officers and staff as may be necessary. (3) All appointments, other than of valuers, chartered accountants or experts, made under this Ordinance, shall be subject to rules and orders of the Federal Government regulating the terms and conditions of persons in public services and posts.] 3[209. Jurisdiction of income tax authorities.- 4[(1) Subject to this Ordinance, the 5[Chief Commissioners], the Commissioners and the Commissioners (Appeals) shall perform all or such functions and exercise all or such powers under this Ordinance as may be assigned to them in respect of such persons or classes of persons or such areas as the Federal Board of Revenue may direct.] (2) The Federal Board of Revenue or the 6[Chief Commissioner] may, by an order, confer upon or assign to any 7[officer of Inland Revenue] all or any of the powers and functions conferred upon or 1 Substituted by the Finance Ordinance, 2002. The original section 208 read as follows: “208. Central Board of Revenue.- The Central Board of Revenue shall exercise the general administration of this Ordinance.” 2 Sub-section (1) substituted vide the Finance Act, 2010, the replaced text read as follows: (1) The Federal Board of Revenue may appoint as many Regional Commissioners of Income Tax, Commissioners of Income Tax, Commissioners of Income Tax (Appeals), taxation officers and such other executive or ministerial officers and staff as may be necessary. 3 Substituted by the Finance Ordinance, 2002. The original section 209 read as follows: “209. Appointment of Regional Commissioners of Income Tax and Commissioners of Income Tax.- (1) The Central Board of Revenue may appoint as many Regional Commissioners of Income Tax and Commissioners of Income Tax as may be necessary. (2) Subject to such orders or directions as may be issued by the Central Board of Revenue, any Regional Commissioner of Income Tax may appoint any subordinate income tax authority subordinate and such other executive or ministerial officers and staff as may be necessary. (3) Subject to such orders or directions as may be issued by the Central Board of Revenue, any Commissioner of Income Tax may appoint such executive or ministerial officers and staff as may be necessary. (4) All appointments under this Ordinance shall be subject to the rules and orders of the Federal Government regulating the terms and conditions of service of persons in public services and posts.” 4 Sub-section (1) substituted for “(1) Subject to this Ordinance, the Regional Commissioners, the Commissioners and the Commissioners (Appeals) shall perform all or such functions and exercise all or such powers, under this Ordinance, in respect of such persons or classes of persons or such areas, as may be assigned to them by orders or directions issued by the Central Board of Revenue.” By the Finance Act, 2003 5 Substituted for “Regional Commissioners” vide the Finance Act, 2010. 6 Substituted for “Regional Commissioner” vide the Finance Act, 2010. 7 Substituted for “taxation officer” vide the Finance Act, 2010. 2010 – 2011 176 The Income Tax Ordinance, 2001 assigned to the Commissioner, under this Ordinance, in respect of any person or persons or classes of persons or areas 1[as may be specified in the order]. (3) An order under sub-section (2) by the 2[Chief Commissioner] shall be made only with the approval of the Federal Board of Revenue. (4) The 3[officer of Inland Revenue] referred to in sub-section (2) shall, for the purposes of this Ordinance, be treated to be the Commissioner. (5) Within the area assigned to him, the Commissioner shall have jurisdiction,- (a) in respect of any person carrying on business, if the person’s place of business is within such area, or where the business is carried on in more than one place, the person’s principal place of business is within such area; or (b) in respect of any other person, if the person resides in such area. 4 (6) Where a question arises as to whether a Commissioner has jurisdiction over a person, the question shall be decided by the 5[Chief Commissioner] or 6[Chief Commissioners] concerned and, if they are not in agreement, by the Federal Board of Revenue. (7) No person shall call into question the jurisdiction of a Commissioner after that person has furnished a return of income to the Commissioner or, where the person has not furnished a return of income, after the time allowed by any notice served on the person for furnishing such return has expired. (8) Notwithstanding anything contained in this section, every commissioner shall have all the powers conferred by, or under, this Ordinance on him in respect of any income arising within the area assigned to him. 7[(8A) The power to confer jurisdiction under this sub-section shall include the power to transfer jurisdiction from one income tax authority to an other.] (9) Where, in respect of any proceedings under this Ordinance, an income tax authority is succeeded by another, the succeeding authority may continue the proceedings from the stage it was left by that authority’s predecessor.] 8[210. Delegation.- (1) The Commissioner 1[subject to sub-section (1A),] may, by an order in writing, delegate to any 2[officer of Inland Revenue, subordinate to the Commissioner] all or any of the powers or Inserted by the Finance Act, 2003 Substituted for “Regional Commissioner” vide the Finance Act, 2010. 3 Substituted for “taxation officer” vide the Finance Act, 2010. 4 An explanation rejected by the Legislators for the Finance Act which was presented in the Finance Bill, 2009 at page No. 43 has erroneously partly printed in the Finance Act, a corrigenda may issue in future. 5 Substituted for “Regional Commissioner” vide the Finance Act, 2010. 6 Substituted for “Regional Commissioners” vide the Finance Act, 2010. 7 Sub-section (8A) inserted by the Finance Act, 2003 8 Substituted by the Finance Ordinance, 2002. The original section 210 read as follows: “210. Jurisdiction of Regional Commissioners of Income Tax and Commissioners of Income Tax.- (1) Subject to this Ordinance, the Regional Commissioners of Income Tax and the Commissioners of Income Tax shall perform such functions in respect of such persons or classes of person, or such areas, as may be assigned to them by directions issued by the Central Board of Revenue. (2) Where any directions issued under sub-section (1) have assigned to two or more income tax authorities the same function in respect of the same persons or class of persons, or the same areas, they shall perform their functions in accordance with such orders as the Central Board of Revenue, or any other authority to whom they are subordinate, may make for the allocation of functions and the distribution of the work performed. (3) Within a Commissioner’s assigned area, the Commissioner shall have jurisdiction, (a) in respect of any person carrying on business, if the person’s place of business is within such area, or where the business is carried on in more than one place, the person’s principal place of business is within such area; or (b) in respect of any other person, if the person resides within such area. (4) Where a question arises as to whether a Commissioner has jurisdiction over any person, the question shall be decided by the Regional Commissioner or Regional Commissioners concerned and, if they are not in agreement, by the Central Board of Revenue. (5) No person shall call into question the jurisdiction of a Commissioner after the person has furnished a return of income to the Commissioner or, where the person has not furnished a return, after the time allowed by any notice served on the person for furnishing such return has expired. 1 2 2010 – 2011 177 The Income Tax Ordinance, 2001 functions conferred upon or assigned to the Commissioner under this Ordinance, other than the power of delegation. 3[(1A) The Commissioner shall not delegate the powers of amendment of assessment contained in sub-section (5A) of section 122 to a 4[an officer of Inland Revenue below the rank of Additional Commissioner Inland Revenue.] 5[(1B) The Commissioner may delegate the powers to a firm of chartered accountants 6[or a firm of Cost and Management Accountant] appointed by the 7[Board or the Commissioner], to conduct the audit of persons selected for audit under section 177. ] (2) An order under sub-section (1) may be in respect of all or any of the persons, classes of persons or areas falling in the jurisdiction of the Commissioner. (3) The Commissioner shall have the power to cancel, modify, alter or amend an order under subsection (1). 8[211. Power or function exercised.- (1) Where, by virtue of an order under section 210, 9[an Officer of Inland Revenue] exercises a power or performs a function of the Commissioner, such power or function shall be treated as having been exercised or performed by the Commissioner. (2) The exercise of a power, or the performance of a function, of the Commissioner by a taxation officer shall not prevent the exercise of the power, or the performance of the function, by the Commissioner.] 10[212. Authority of approval.- The Federal Board of Revenue may, by a general or special order, authorise the Regional Commissioner or the Commissioner to grant approval in any case where such approval is required from the Federal Board of Revenue under any provision of this Ordinance.] 11[213. Guidance to income tax authorities.- In the course of any proceedings under this Ordinance, the Commissioner or any taxation officer may be assisted, guided or instructed by any income tax authority to whom he is subordinate or any other person authorised in this behalf by the Federal Board of Revenue.] 12[214. Income tax authorities to follow orders of the Federal Board of Revenue.- (1) Subject to subsection (2), all income tax authorities and other persons employed in the execution of this Ordinance shall observe and follow the orders, instructions and directions issued by the Federal Board of Revenue. (6) Notwithstanding anything contained in this section, every Commissioner shall have all the powers conferred by, or under this Ordinance on a Commissioner in respect of any income arising within the Commissioner’s assigned area. (7) Where any application may be made by a person under this Ordinance, the application shall be made to the Commissioner with jurisdiction over the person or to the taxation officer with delegated power in respect of the application.” 1 Inserted by the Finance Act, 2004. 2 Substituted for “taxation officer” vide the Finance Act, 2010. 3 Added by the Finance Act, 2004. 4 Substituted for “Taxation Officer below the rank of Additional Commissioner of Income Tax” vide the Finance Act, 2010. 5 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009APPOINTMENT OF CHARTERED ACCOUNTANTS FOR INCOME AUDIT. [Section 210(1B)] By addition of a new sub-section (1B) to section 210 of the Income Tax Ordinance, 2001, Commissioner has been empowered to delegate powers of carrying out audit under section 177, to a firm of Chartered Accountants appointed by the Board. The amendment seeks to complete the legal requirements necessary for Chartered Accountants to perform their audit functions under the Ordinance. Sub-section (1B) inserted vide the Finance Act, 2009. 6 Words inserted vide the Finance Act, 2010 7 Substituted for “Board” vide the Finance Act, 2010. 8 Substituted by the Finance Ordinance, 2002. The original section 211 read as follows: “211. Delegation.- The Commissioner may delegate to any taxation officer any duty, power, or function conferred or imposed on the Commissioner under this Ordinance, other than the power of delegation under this section.” 9 Substituted for “a taxation officer” vide the Finance Act, 2010. 10 Substituted by the Finance Ordinance, 2002. The original section 212 read as follows: “212. Authority of approval.- The Central Board of Revenue may, by general or special order, in writing, authorise the Regional Commissioner or the Commissioner to grant approval in any case where such approval is required from the Central Board of Revenue under any provision of this Ordinance.” 11 Substituted by the Finance Ordinance, 2002. The original section 213 read as follows: “213. Exercise of jurisdiction by successor.- Where, in respect of any proceedings under this Ordinance, an income tax authority is succeeded by another, the succeeding authority may continue the proceedings from the stage at which it was left by that authority’s predecessor.” 12 Substituted by the Finance Ordinance, 2002. The original section 214 read as follows: 2010 – 2011 178 The Income Tax Ordinance, 2001 (2) No orders, instructions or directions shall be given by the Federal Board of Revenue that will interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate function.] 1[214A. Condonation of time limit.— Where any time or period has been specified under any of the provisions of the Ordinance or rules made there-under within which any application is to be made or any act or thing is to be done, the Board may, in any case or class of cases, permit such application to be made or such act or thing to be done within such time or period as it may consider appropriate: Provided that the Board may, by notification in the official Gazette, and subject to such limitations or conditions as may be specified therein, empower any Commissioner or Director General under this Ordinance to exercise the powers under this section in any case or class of cases. 2214B. Power of the Board to call for records.- (1) The Board may, of its own motion, call for and examine the record of any departmental proceedings under this Ordinance or the rules made there-under for the purpose of satisfying itself as to the legality or propriety of any decision or order passed therein and may pass such order as it may think fit: Provided that no order imposing or enhancing any tax or penalty than the originally levied shall be passed unless the person affected by such order has been given an opportunity of showing cause and of being heard. (2) No proceeding under this section shall be initiated in a case where an appeal is pending. (3) No order shall be made under this Section after the expiry of three years from the date of original decision or order.] 3[214C. Selection for audit by the Board,- (1) The Board may select persons or classes of persons for audit of Income Tax affairs through computer ballot which may be random or parametric as the Board may deem fit. (2) Audit of Income Tax affairs of persons selected under sub-section (1) shall be conducted as per procedure given in section 177 and all the provisions of the Ordinance, except the first proviso to subsection (1) of section 177, shall apply accordingly. (3) For the removal of doubt it is hereby declared that Board shall be deemed always to have had the power to select any persons or classes of persons for audit of Income Tax affairs.] “214. Guidance to Commissioner or taxation officer.- In the course of any proceedings under this Ordinance, the Commissioner or any taxation officer with delegated power under section 211 may be assisted, guided or instructed by any income tax authority to whom he is subordinate or any other person authorised in this behalf by the Central Board of Revenue.” EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009CONDONATION OF TIME LIMIT. [Section 214A] 49.1 A new section 214A has been inserted which provides that where any time or period has been specified under any provisions of the Ordinance or rules made there-under within which any application is to be made or any act or thing is to be done, the Board may, in any case or class of cases, permit such application to be made or such act or thing to be done within such time or period as it may consider appropriate. 49.2 The Board is also empowered to allow any Commissioner or Director General to exercise the powers under this section in any case or class of cases by issuing notification in the official gazette and subject to such limitation or condition as may be specified therein.Sections 214A & 214B inserted vide the Finance Act, 2009. 2 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009POWER OF THE BOARD TO CALL FOR RECORDS. [Section 214B] A new section 214B has been introduced which empowers the Board to call for and examine record of any departmental proceedings under this Ordinance or the rules made there under for the purpose of satisfying itself as to the legality or propriety of any decision or order passed therein and may pass such order as it may think fit. The Board shall, however, not pass any order imposing or enhancing any tax or penalty, unless the concerned person has been given an opportunity of being heard. A limitation period of 3 years starting from the date of original decision or order has been provided to pass such order by the Board. 3 Section 214C inserted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 SELECTION FOR AUDIT BY THE BOARD [Section 214C]. Through introduction of new section 214C in the Income Tax Ordinance, 2001 Federal Board of Revenue has been empowered to select person or classes of persons for audit through random or parametric computer ballot. Audit in such cases shall be conducted in accordance with the provisions of section 177 [except the first proviso to sub-section (1) of section 177] of the Income Tax Ordinance, 2001 and the Board shall be deemed always to have had such powers. 2010 – 2011 179 The Income Tax Ordinance, 2001 1[215. Furnishing of returns, documents etc.- (1) Where, by virtue of an order under section 210, the Commissioner has delegated to any 2[officer of Inland Revenue] the function and power to receive, or to call for and receive, any returns of income, certificates, documents, accounts and statements from any person or persons or class of persons (hereinafter called ‘filer’), the filer shall furnish such returns, certificates, documents, accounts and statements to that 3[officer of Inland Revenue] and, when furnished, shall be treated as having been furnished to the Commissioner. (2) where a person is allowed, under any provision of this Ordinance, to make an application to the Commissioner and the Commissioner has delegated to any 4[officer of Inland Revenue] the function or power to receive the application, such application, when made, shall be treated as having been made to the Commissioner.] 216. Disclosure of information by a public servant.- (1) All particulars contained in – (a) any statement made, return furnished, or accounts or documents produced under the provisions of this Ordinance; (b) any evidence given, or affidavit or deposition made, in the course of any proceedings under this Ordinance, other than proceedings under Part XI of Chapter X; or (c) any record of any assessment proceedings or any proceeding relating to the recovery of a demand, shall be confidential and no public servant save as provided in this Ordinance may disclose any such particulars. (2) Notwithstanding anything contained in the Qanun-e--5[Shahadat], 1984 (P.O. Order No. 10 of 1984), or any other law for the time being in force, no court or other authority shall be, save as provided in this Ordinance, entitled to require any public servant to produce before it any return, accounts, or documents contained in, or forming a part of the records relating to any proceedings under this Ordinance, or any records of the Income Tax Department generally, or any part thereof, or to give evidence before it in respect thereof. (3) Nothing contained in sub-section (1) shall preclude the disclosure of any such particulars – (a) to any person acting in the execution of this Ordinance, where it is necessary to disclose the same to him for the purposes of this Ordinance; (b) to any person authorised by the Commissioner in this behalf, where it is necessary to disclose the same to such person for the purposes of processing of data and preparation of computer printouts relating to returns of income or calculation of tax; (c) where the disclosure is occasioned by the lawful employment under this Ordinance of any process for the service of any notice or the recovery of any demand; (d) to the Auditor-General of Pakistan for the purpose of enabling the Auditor-General to discharge his functions under the Constitution; (e) to any officer appointed by the Auditor-General of Pakistan or the Commissioner to audit income tax receipts or refunds; Substituted by the Finance Ordinance, 2002. The original section 215 read as follows: “215. Taxation officers to follow orders of Central Board of Revenue.- (1) Subject to sub-section (2), all taxation officers and other persons employed in the execution of this Ordinance shall observe and follow the orders, instructions and directions of the Central Board of Revenue. (2) No orders, instructions or directions shall be given by the Central Board of Revenue that will interfere with the discretion of the Commissioner (Appeals) in the exercise the appellate function of the Commissioner (Appeals).” 2 Substituted for “taxation officer” vide the Finance Act, 2010. 3 Substituted for “taxation officer” vide the Finance Act, 2010. 4 Substituted for “taxation officer” vide the Finance Act, 2010. 5 The word “Shadat” substituted by the Finance Act, 2005. 1 2010 – 2011 180 The Income Tax Ordinance, 2001 (f) to any officer of the Federal Government or a Provincial Government authorised by such Government in this behalf as may be necessary for the purpose of enabling that Government to levy or realise any tax imposed by it; (g) to any authority exercising powers under 1[the 2[Federal Excise Act, 2005], ] the Sales Tax Act, 1990, the Wealth Tax Act, 1963 (XV of 1963), or the Customs Act, 1969 (IV of 1969), as may be necessary for the purpose of enabling its duty to exercise such powers; (h) occasioned by the lawful exercise by a public servant of powers under the Stamp Act, 1899 (II of 1899) to impound an insufficiently stamped document; (i) to the State Bank of Pakistan to enable it to compile financial statistics of international investment and balance of payment; (j) as may be required by any order made under sub-section (2) of section 19 of the Foreign Exchange Regulation Act, 1947 (VII of 1947), or for the purposes of any prosecution for an offence under section 23 of that Act; (k) to the Securities and Exchange Commission or the Monopolies Control Authority for the purposes of the Securities and Exchange Ordinance, 1969 (XVII of 1969), the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 (VI of 1970), the Companies Ordinance, 1984 (XLVII of 1984) or the Securities and Exchange Commission of Pakistan Act, 1997, as the case may be; (l) relevant to any inquiry into a charge of misconduct in connection with income tax proceedings against a legal practitioner or an accountant; (m) to a Civil Court in any suit or proceeding to which the Federal Government or any income tax authority is a party which relates to any matter arising out of any proceedings under this Ordinance; (n) for the purposes of a prosecution for any offence under the Pakistan Penal Code, 1860 (XLVI of 1860), in respect of any such statement, returns, accounts, documents, evidence, affidavit or deposition, or for the purposes of a prosecution for any offence under this Ordinance; (o) relevant to any inquiry into the conduct of an official of the Income Tax Department to any person or officer appointed to hold such inquiry, or to a Public Service Commission, established under the Federal Public Service Commission Ordinance, 1977 (XLV of 1977), when exercising its functions in relation to any matter arising out of such inquiry; (p) as may be required by any officer or department of the Federal Government or of a Provincial Government for the purpose of investigation into the conduct and affairs of any public servant, or to a Court in connection with any prosecution of the public servant arising out of any such investigation; (q) to an authorised officer of the government of any country outside Pakistan with which the Government has entered into an agreement under section 107 for the avoidance of double taxation and the prevention of fiscal evasion as may be required to be disclosed in pursuance of that agreement; or (r) to the Federal Tax Ombudsman appointed under the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000 (XXXV of 2000). (4) Nothing in this section shall apply to the production by a public servant before a Court of any document, declaration, or affidavit filed or the giving of evidence by a public servant in respect thereof. (5) Nothing contained in sub-section (1) shall prevent the Commissioner from publishing, with the prior approval of the Federal Government, any such particulars as are referred to in that sub-section. 1 Substituted for the words, commas, figures and brackets ” the Central Excises and Salt Act, 1944 (I of 1944), the Estate Duty Act, 1950 (X of 1950)” by the Finance Ordinance, 2002. 2 The words, comma, figure and brackets “Central Excises Act, 2944 (I of 1944)” substituted by the Finance Act, 2005. 2010 – 2011 181 The Income Tax Ordinance, 2001 (6) Nothing contained in sub-section (1) shall prevent the Federal Government from publishing particulars and the amount of tax paid by a holder of a public office as defined in the 1[National Accountability Bureau Ordinance, 1999 (XVIII of 1999).] (7) Any person to whom any information is communicated under this section, and any person or employee under the first-mentioned person’s control, shall be, in respect of that information, subject to the same rights, privileges, obligations, and liabilities as if the person were a public servant and all the provisions of this Ordinance, so far as may be, shall apply accordingly. (8) No prosecution may be instituted under this section except with the previous sanction of the Federal Board of Revenue. 217. Forms and notices; authentication of documents.- (1) Forms, notices, returns, statements, tables and other documents required under this Ordinance may be in such form as determined by the Federal Board of Revenue for the efficient administration of this Ordinance and publication of such documents in the official Gazette shall not be required. (2) The Commissioner shall make the documents referred to in sub-section (1) available to the public in the manner prescribed. (3) A notice or other document issued, served or given by the Commissioner under this Ordinance shall be sufficiently authenticated if the name or title of the Commissioner, or authorised 2[officer of Inland Revenue], is printed, stamped or written on the notice or document 3[or if it is computer generated and bears the authentication in the manner prescribed by the Board]. 218. Service of notices and other documents.- (1) Subject to this Ordinance, any notice, order or requisition required to be served on a resident individual (other than in a representative capacity) for the purposes of this Ordinance shall be treated as properly served on the individual if – (a) personally served on the individual or, in the case of an individual under a legal disability or a nonresident individual, the representative of the individual; (b) sent by registered post or courier service to the place specified in clause (b) 4[of sub-section (2)] or to the individual’s usual or last known address in Pakistan; or (c) served on the individual in the manner prescribed for service of a summons under the Code of Civil Procedure, 1908 (V of 1908). (2) Subject to this Ordinance, any notice, order or requisition required to be served on any person (other than a resident individual to whom sub-section (1) applies) for the purposes of this Ordinance shall be treated as properly served on the person if – (a) personally served on the representative of the person; (b) sent by registered post or courier service to the person’s registered office or address for service of notices under this Ordinance in Pakistan, or where the person does not have such office or address, the notice is sent by registered post to any office or place of business of the person in Pakistan; or (c) served on the person in the manner prescribed for service of a summons under the Code of Civil Procedure, 1908 (V of 1908). (3) Where an association of persons is dissolved, any notice, order or requisition required to be served under this Ordinance on the association may be served on any person who was 5[the principal officer or] a member of the association immediately before such dissolution. Substituted for the words, figures brackets and comma “Ehtesab Act, 1997 (IX of 1997)” by the Finance Ordinance, 2002. Substituted for “taxation officer” vide the Finance Act, 2010. 3 Words inserted vide the Finance Act, 2010 4 Inserted by the Finance Act, 2003 5 Inserted by the Finance Ordinance, 2002. 1 2 2010 – 2011 182 The Income Tax Ordinance, 2001 (4) Where section 117 applies, any notice, order or requisition required to be served under this Ordinance on the person discontinuing the business may be served on the person personally or on any individual who was the person’s representative at the time of discontinuance. (5) The validity of any notice issued under this Ordinance or the validity of any service of a notice under this Ordinance shall not be called into question after the return to which the notice relates has been furnished or the notice has been otherwise complied with. 219. Tax or refund to be computed to the nearest Rupee.- In the determination of any amount of tax or refund payable under this Ordinance, fractions of a rupee less than fifty paisa shall be disregarded and fractions of a rupee equal to or exceeding fifty paisa shall be treated as one rupee. 220. Receipts for amounts paid.- The Commissioner shall give a receipt for any tax or other amount paid or recovered under this Ordinance. 221. Rectification of mistakes.- (1) The Commissioner, the Commissioner (Appeals) or the Appellate Tribunal may, by an order in writing, amend any order passed by 1[him] to rectify any mistake apparent from the record on 2[his or its] own motion or any mistake brought to 3[his or its] notice by a taxpayer or, in the case of the Commissioner (Appeals) or the Appellate Tribunal, the Commissioner. 4[(1A) The Commissioner may, by an order in writing, amend any order passed under the repealed Ordinance by the Deputy Commissioner, or an Income Tax panel, as defined in section 2 of the repealed Ordinance to rectify any mistake apparent from the record on his own motion or any mistake brought to his notice by a taxpayer and the provisions of sub-section (2), sub-section (3) and subsection (4) shall apply in like manner as these apply to an order under sub-section (1).] (2) No order under sub-section (1) which has the effect of increasing an assessment, reducing a refund or otherwise applying adversely to the taxpayer shall be made unless the taxpayer has been given a reasonable opportunity of being heard. (3) Where a mistake apparent on the record is brought to the notice of the Commissioner 5[or] Commissioner (Appeals) 6[ ], as the case may be, and no order has been made under sub-section (1) before the expiration of the financial year next following the date on which the mistake was brought to their notice, the mistake shall be treated as rectified and all the provisions of this Ordinance shall have effect accordingly. (4) No order under sub-section (1) may be made after five years from the date of the order sought to be rectified. 222. Appointment of expert.- The Commissioner may appoint any expert as the Commissioner considers necessary for the purposes of this Ordinance, including for the purposes of audit or valuation. 223. Appearance by authorised representative.- (1) Any taxpayer who is entitled or required to attend before the Commissioner, the Commissioner (Appeals) or the Appellate Tribunal in connection with any proceeding under this Ordinance may, except when required under section 176 to attend personally, attend by an authorised representative. (2) For the purposes of this section and subject to sub-section (3), an authorised representative of a taxpayer shall be a person who is a representative of the person under section 172 and any of the following persons, namely:– (a) A relative of the taxpayer; (b) a current full-time employee of the taxpayer; Substituted for “them” by the Finance Act, 2003 Substituted for “their” by the Finance Act, 2003 3 Substituted for “their” by the Finance Act, 2003 4 Sub-section (1A) inserted by the Finance Act, 2003 5 Substituted for “,” by the Finance Act, 2003 6 Words “or the Appellate Tribunal” by the Finance Act, 2003 1 2 2010 – 2011 183 The Income Tax Ordinance, 2001 (c) any officer of a scheduled bank with which the taxpayer maintains a current account or has other regular dealings; (d) any legal practitioner entitled to practice in any Civil Court in Pakistan; (e) any accountant; or (f) any income tax practitioner. (3) For the purposes of this section -– (a) no person who has been dismissed or removed from service in the Income Tax Department shall be entitled to represent a taxpayer under sub-section (1); (b) no person having resigned from service after having been employed in the Income Tax Department for not less than two years shall be entitled to represent a taxpayer under sub-section (1) for a period of two years from the date of resignation; (c) no person having retired from service in the Income Tax Department shall be entitled to represent a taxpayer under sub-section (1) for a period of one year from the date of retirement in any case in which the person had made or approved, as the case may be, any order of assessment, refund or appeal within one year before the date of retirement; or (d) no person who has become insolvent shall be entitled to represent a taxpayer under sub-section (1) for so long as the insolvency continues; (e) no person who has been convicted of an offence in relation to any income tax proceedings under this Ordinance shall be entitled to represent a taxpayer under sub-section (1) for such period as the Commissioner may, by order in writing, determine. (4) Where any legal practitioner or accountant is found guilty of misconduct in a professional capacity by any authority entitled to take disciplinary action against the legal practitioner or accountant, an order passed by that authority shall have effect in relation to any right to represent a taxpayer under subsection (1) as it has in relation to the person’s right to practice as a legal practitioner or accountant. (5) Where any person (other than a person to whom sub-section (4) applies) is found guilty of misconduct in relation to any income tax proceeding, the Commissioner may, by an order in writing, direct that the person cease to represent a taxpayer under sub-section (1) before the Commissioner, Commissioner (Appeals) or Appellate Tribunal. (6) The Commissioner shall not make an order under clause (e) of sub-section (3) or sub-section (5) in respect of any person, unless the Commissioner has given the person a reasonable opportunity to be heard. (7) Any person against whom an order under clause (e) of sub-section (3) or sub-section (5) has been made may, within thirty days of service of notice of the order, appeal to the Federal Board of Revenue to have the order cancelled. (8) The Federal Board of Revenue may admit an appeal after the expiration of the period specified in sub-section (7) if satisfied that the appellant was prevented by sufficient cause from lodging the appeal within the period. (9) No order made under clause (e) of sub-section (3) or sub-section (5) shall take effect until thirty days after notice of the order is served on the person or, where an appeal has been lodged under subsection (7), until the disposal of the appeal. 2010 – 2011 184 The Income Tax Ordinance, 2001 (10) The Federal Board of Revenue may make rules under section 1[237] for the registration of income tax practitioners and related matters, including establishing a code of conduct for such practitioners. (11) In this section – “accountant” means – (a) a chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961); (b) a cost and management accountant within the meaning of the Cost and Management Accountants Act, 1966 (XIV of 1966); or (c) a member of any association of accountants recognised for the purposes of this section by the Federal Board of Revenue; and “income tax practitioner” means a person who is registered as such by the Federal Board of Revenue, being a person who possesses such qualifications as may be prescribed for the purposes of this section or who has retired after putting in satisfactory service in the Income Tax Department for a period of not less than ten years in a post or posts not below that of Income Tax Officer. 224. Proceedings under the Ordinance to be judicial proceedings.- Any proceedings under this Ordinance before the Commissioner, Commissioner (Appeals) or Appellate Tribunal shall be treated as judicial proceedings within the meaning of sections 193 and 228 of the Pakistan Penal Code, 1860 (Act XLV of 1860), and for the purposes of section 196 of the Pakistan Penal Code, 1860 (Act XLV of 1860). 225. Proceedings against companies under liquidation.- Notwithstanding anything contained in section 316 of the Companies Ordinance, 1984 (XLVII of 1984), leave of the Court shall not be required for continuing with or commencing any proceeding under this Ordinance against a company in respect of which a winding up order has been made or Provisional Liquidator appointed. 226. Computation of limitation period.- In computing the period of limitation, there shall be excluded – (a) in the case of an appeal or an application under this Ordinance, the day on which the order complained of was served and, if the taxpayer was not furnished with a copy of the order when the notice of the order was served on the taxpayer, the time requisite for obtaining a copy of such order; and 2[(b) in the case of an assessment or other proceeding under this Ordinance,- (i) the period, if any, for which such proceedings were stayed by any Court, Appellate Tribunal or any other authority; or (ii) the period, if any, for which any proceeding for the tax year remained pending before any Court, Appellate Tribunal or any other authority.] 3[(1)] Bar of suits in Civil Courts.- No suit or other legal proceeding shall be brought in any 227. Civil Court against any order made under this Ordinance, and no prosecution, suit or other proceedings Substituted for the figure “232” by the Finance Ordinance, 2002. Clause (b) substituted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 COMPUTATION OF LIMITATION PERIOD [Section 226]. Clause (b) of section 226 of the Income Tax Ordinance, 2001 has been substituted to provide for exclusion of the period from the period of limitation for assessment purposes, for which proceedings for a taxpayer remained stayed or pending before any Court, Appellate Tribunal or any other authority. The replaced text with amendment details read as follows: (b) in the case of an assessment or other proceeding under this Ordinance, the period, if any, for which such proceedings were stayed by 2[any Court, 2[Appellate] Tribunal or any other authority.] 2 Substituted for “additional tax” vide the Finance Act, 2010. 2 Substituted for the words, brackets and comma “the Commissioner (Appeals), the Tribunal or any Court” by the Finance Ordinance, 2002. 2 Inserted by the Finance Act, 2003 3 Section re-numbered as sub-section (1) vide the Finance Act, 2010. 1 2 2010 – 2011 185 The Income Tax Ordinance, 2001 shall be made against any person for anything which is in good faith done or intended to be done under this Ordinance or any rules or orders made thereunder. 1[(2) Notwithstanding anything contained in any other law for the time being in force, no investigation or inquiry shall be undertaken or initiated by any governmental agency against any officer or official for anything done in his official capacity under this Ordinance, rules, instructions or direction made or issued there-under without the prior approval of the Board.] PART II DIRECTORATE-GENERAL OF 2[INTERNAL AUDIT] 3[228. The Directorate General of [4]Internal Audit.- (1) The Directorate General of [5] Internal Audit shall consist of a Director-General and as many Directors, Additional Directors, Deputy Directors and Assistant Directors and such other officers as the Board, may by notification in the official Gazette, appoint. (2) The Board may, by notification in the official Gazette, specify the functions, jurisdiction and powers of the Directorate General of [6] Internal Audit.] 7[229. Directorate General of Training and Research.- (1) The Directorate General of Training and Research shall consist of a Director General, Additional Director General and as many Directors, Additional Directors, Deputy Directors, Assistant Directors and such officers as the Board, may, by notification in the official Gazette, appoint. (2) The Board may, by notification in the official Gazette, specify the functions, jurisdiction and powers of the Directorate General of Training and Research and its officers.] 8[ 229. ] 9[ 230. ] 1[ 231. ] Sub-section (2) added vide the Finance Act, 2010. Substituted for “INSPECTION” by the Finance Act, 2007. 3 Substituted by the Finance Act, 2005. The substituted section 228 read as follows: “228. Appointment of Directorate-General of Inspection.- (1) The Federal Government shall appoint a Directorate-General of Inspection to exercise the powers and discharge the functions conferred on it under this Part. (2) The Directorate-General shall consist of a Director-General and as many Directors, Additional Directors, Deputy Directors, Assistant Directors, Extra-Assistant Directors and Inspectors, as the Director-General may consider necessary to be appointed from among the officers of the Income Tax Group.” 4 Words “Inspection and” omitted by the Finance Act, 2007. 5 Words “Inspection and” omitted by the Finance Act, 2007. 6 Words “Inspection and” omitted by the Finance Act, 2007. 7 Section 229 added vide the Finance Act, 2010. 8 Omitted by the Finance Act, 2005. The omitted section 229 read as follows: “229. Inspection authorities.- (1) There shall be the following classes of inspection authorities for the purposes of this Ordinance, namely:(a) The Director-General of Inspection; and (b) Directors of Inspection. (2) The Directors of Inspection shall be subordinate to the Director-General of Inspection.” 9 Omitted by the Finance Act, 2005. The omitted section 230 read as follows: “230. Jurisdiction of Inspection Authorities.- (1) Subject to the provisions of this Chapter, the Directors of Inspection shall perform their functions in respect of such persons or classes of persons or such areas as may be assigned to them by the Director-General. (2) The Director-General or a Director of Inspection may assign any function in respect of any area, or office or offices located within an area, case, class of cases, person or classes of persons to any inspection officer working under his control. (3) In this section, “inspection officer” means an Additional Director of Inspection, a Deputy Director of Inspection, an Assistant Director and an Extra-Assistant Director.” 1 2 2010 – 2011 186 The Income Tax Ordinance, 2001 2[PART III DIRECTORATE-GENERAL OF WITHHOLDING TAXES 230A. Directorate-General of Withholding Taxes.—(1) The Directorate-General of Withholding Taxes shall consist of a Director General and as many Directors, Additional Directors, Deputy Directors and Assistant Directors and such other officers as the Board, may by notification in the official Gazette, appoint. (2) The Board may, by notification in the official Gazette, specify the functions, jurisdiction and powers of the Directorate-General of Withholding Taxes.] CHAPTER XII TRANSITIONAL ADVANCE TAX PROVISIONS 3[Â231A. ÊCash 4[(1) Every banking company shall deduct tax at the rate withdrawal from a bank.specified in Division VI of Part IV of the First Schedule, if the payment for cash withdrawal, or the sum total of the payments for cash withdrawal in a day, exceeds twenty-five thousand rupees.] (2) Advance tax under this section shall not be collected in the case of withdrawals made by,(a) the Federal Government or a Provincial Government; (b) a foreign diplomat or a diplomatic mission in Pakistan; or (c) a person who produces a certificate from the Commissioner that his income during the tax year is exempt.] 5[231AA. Advance tax on transactions in bank.- (1) Every banking company, non-banking financial institution, exchange company or any other authorized dealer of foreign exchange shall collect advance tax 1 Omitted by the Finance Act, 2005. The omitted section 231 read as follows: “231. Functions and Powers of Directorate.- (1) The functions of the Directorate-General of Inspection shall be, namely:(a) To carry out inspections of income tax cases and offices; (b) to investigate or cause investigation to be carried out in respect of – (i) cases involving leakage of revenue or evasion of taxes; and (ii) Regional Commissioners of Income Tax, Commissioners of Income Tax, taxation officers and any other staff of income tax offices allegedly involved in corruption and malpractice, and recommend to the competent authority appropriate disciplinary action; (c) to carry out audit of cases or offices involving income tax revenues; (d) to recommend to the Central Board of Revenue in matters of tax policy, tax administration and tax operations; (e) to furnish an annual report about the workings of Income Tax Offices to the Central Board of Revenue by the thirty-first day of December, following the end of the financial year to which it relates; and (f) to carry out any other work or function that may be assigned to it by the Federal Government. (2) In discharge of its functions under sub-section (1), the Directorate-General shall have the powers specified in section 176.” 2 Part III inserted by the Finance Act, 2008. 3 Inserted by the Finance Act, 2005. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008ENHANCEMENT OF WITHHOLDING TAX ON CASH WITHDRAWAL FROM BANKS. [Section 231A read with Division VI of Part IV of the First Schedule]. Withholding tax on cash withdrawal @ rate of 0.1% was introduced through Finance Act, 2005 which was adjustable against final tax. Subsequently, the rate of deduction was enhanced to 0.2% in the year 2006. This was also adjustable advance tax. In fact this tax was imposed to encourage documentation of economy and broadening the tax base. It was also an attempt to encourage payment of tax in advance for adjustment against final tax. The rate of withholding tax on cash withdrawal from banks has been enhanced to 0.3%, which would remain adjustable as before. Â SECTION 6 OF IT CIRCULAR DATED THE 27TH JUNE, 2006 A withholding tax @ 0.1% was levied in 2005 on cash withdrawals from the banks exceeding Rs.25,000/-. The rate of withholding tax has been enhanced from 0.1% to 0.2% of the amount withdrawn. The limit of Rs.25,000/- per transaction has been changed to per day basis. Ê Please refer IT Cir. No. 4 dated the 14th July, 2005, Letter dt. 30/6/05 & Cir. 1 of 2005 at ANNEXURE’S page No. 1 to 4. 4 Sub-section (1) substituted by the Finance Act, 2006. The old subsection read as follows: (1) Every banking company shall, at the time of making a payment for cash withdrawal exceeding twenty-five thousand rupees, deduct tax from the payment at the rate specified in Division VI of Part IV of the First Schedule. 5 Section 231AA inserted vide the Finance Act, 2010. INCOME TAX Circular No. 10 dated the the July 16, 2010 ADVANCE TAX ON TRANSACTIONS IN BANK [Section 231AA]. 2010 – 2011 187 The Income Tax Ordinance, 2001 at the time of sale against cash of any instrument, including Demand Draft, Pay Order, CDR, STDR, SDR, RTC, or any other instrument of bearer nature or on receipt of cash on cancellation of any of these instruments: Provided that this sub-section shall not be applicable in case of inter-bank or intra-bank transfer and also where payment is made through a crossed cheque for purchase of a financial instrument as referred to in sub-section (1). (2) Every banking company, non-banking financial institution, exchange company or any other authorized dealer of foreign exchange shall collect advance tax at the time of transfer of any sum against cash through online transfer, telegraphic transfer, mail transfer or any other mode of electronic transfer. (3) The advance tax under this section shall be collected at the rate specified in Division VIA of Part IV of the First Schedule, where the sum of total payments for transactions mentioned in sub-section (1) or subsection (2) as the case may be, exceed twenty-five thousand rupees in a day. (4) Advance tax under this section shall not be collected in the case of transactions made by,(a) the Federal Government or a Provincial Government; (b) a foreign diplomat or a diplomatic mission in Pakistan; or (c) a person who produces a certificate from the Commissioner that its income during the tax year is exempt.] 1[231B. Advance tax on private motor vehicles.- Every motor vehicle registering authority of Excise and Taxation Department shall collect advance tax at the time of registration of a new locally manufactured motor vehicle, at the rates specified in Division VII of Part IV of the First Schedule: A new section 231AA has been introduced in the Income Tax Ordinance, 2001.Banking transactions shall be charged to adjustable advance tax as under: This tax shall be chargeable only on purchase through CASH of any of the following instruments:(i) Demand Draft; (ii) Pay order; (iii) Call Deposit Receipt (CDR); (iv) Special Deposit Receipt (SDR); (v) Short Term Deposit Receipt (STDR); (vi) Rupee Traveller Cheque (RTC); or (vii) Any other instrument of bearer nature; This tax shall be collected on CASH sale of any of the above mentioned instrument by any:(i) Banking company; (ii) Non-banking financial institution; (iii) Exchange company; or (iv) Any authorized dealer of foreign exchange Such tax shall also be deductible on transfers AGAINST CASH including:(i) on line transfer; (ii) telegraphic transfer; (iii) mail transfer; and (iv) any other mode of electronic transfer. This tax shall also be charged on payment if made in cash on cancellation of any of the instruments referred above in cases where tax is not withheld on preparation of such instrument against cash. This tax shall only be charged where total amount of payments for transactions referred to above exceeds twenty five thousand rupees in a day. This tax shall not be collected on – (i) payment made through a crossed cheque for purchase of any of the financial instrument as referred above; (ii) inter-bank and intra-bank transfers. (iii) transactions made by the Federal or a Provincial Government; (iv) transactions made by a foreign diplomat or a diplomatic mission in Pakistan; and transactions made by a person who produces a certificate from the Commissioner that his income during the tax year is exempt; and (v) online transmission of day to day collections to centralized account of a distributor, where the depositor and the beneficiary is the same, maintained under cash management arrangements provided by a bank, shall be treated as inter bank transfer. Tax deducted under this section shall be adjustable against overall tax liability of the taxpayer and tax deducted under the provisions of this section shall be deposited to the relevant Commissioner Inland Revenue as required under the Law.] You may also refer INCOME TAX Circular No. 7 dated the the June 30, 2010 1 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009COLLECTION OF ADVANCE TAX ON PRIVATE MOTOR VEHICLES. [Section 231B] Section 231B has been substituted to provided that every motor registering authority shall collect advance tax at the time of registration of a new locally manufactured motor vehicle, at the rate specified in Division-VII of Part-IV of the First Schedule. Previously the authority for collection of this tax was not specified which had created problems for field formations in enforcement of 2010 – 2011 188 The Income Tax Ordinance, 2001 Provided that the provisions of this section shall not be applicable in the case of – (a) the Federal Government; (b) the Provincial Government; (c) the Local Government; (d) a foreign diplomat; or (e) a diplomatic mission in Pakistan] 1 [232.] 1[233. Â ÊBrokerage and commission.- (1) Where any payment on account of brokerage or commission is made by the Federal Government, a Provincial Government, a 2[Local Government], a company or an this provision. Further, the Local Government has also been included in the list of person to whom the provision of this section shall not apply. Section 231B substituted vide the Finance Act, 2009, the replaced section read as follows: 1[231 B. Purchase of motor cars and jeeps.—Every person shall pay, at the time of registration of a new motor car or a jeep, advance tax at the rates specified in Division VII of Part IV of the First Schedule: Provided that the provisions of this section shall not be applicable in the case of – (i) the Federal Government; (ii) the Provincial Government; (iii) a foreign diplomat; or (iv) a diplomatic mission in Pakistan.] 1 Section 231B substituted by the Finance Act, 2008, it was inserted by the Finance Act, 2007, the replaced section read as follows: Ð Purchase of motor cars,—(1) Every manufacturer or authorized dealer of motor cars shall at the time of sale of a motor car, collect advance tax at the rate specified in Division VIII of Part IV, of the First Schedule. (2) Advance tax under this section shall not be collected in the case of purchase made by— (i) the Federal Government or a Provincial Government; or (ii) a foreign diplomat or diplomatic mission in Pakistan. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. WITHHOLDING TAX ON PURCHASE OF LOCALLY MANUFACTURED CARS. [Section 231B – Clause (9A) Part II] A new section 231B has been inserted envisaging that every manufacturer or its authorized dealer of cars is obliged to collect advance tax @ 2.5% (as amended by clause (9A) of Part II) of the value of car after 31.08.2007 at the time of sale, irrespective of the date of booking or advance payment made by the purchaser. The tax so collected is adjustable and the taxpayers are entitled to claim credit of the same while filing return of income for the relevant tax year. 1 Omitted by the Finance Ordinance, 2002. The omitted section 232 read as follows: “232. Transfer of funds.- (1) Advance tax at the rate specified in Part-IV of the First Schedule shall be collected by a person— (a) clearing an outstation cheque of an amount excluding twenty-five thousand rupees; (b) issuing a demand draft, pay order, special deposit receipts, cash deposit receipt or rupee traveller’s cheque; and (c) effecting a telegraphic or electronic transfer of funds, from the drawer of such cheque, draft, pay order, receipt or person ordering transfer of funds. (2) Advance tax under sub-section (1) shall not be collected in the case of payments made by— (a) Federal Government, Provincial Governments, statutory bodies and universities; (b) a non-profit organization within the meaning of clause (37) of section 2; (c) an industrial undertaking or institution exempt from tax under the Second Schedule; (d) a public company whose shares are traded on a registered stock exchange in Pakistan; (e) a foreign diplomat or a foreign diplomatic mission in Pakistan; (f) a branch or office of a company to another branch or office of such company; (g) a person who holds National Tax Number and furnishes a statement to that bank in the prescribed from and manner.” 2010 – 2011 189 The Income Tax Ordinance, 2001 association of persons constituted by, or under any law (hereinafter called the “principal”) to a [3] person (hereinafter called the “agent”), the principal shall deduct advance tax at the rate specified in 4[Division II of] Part IV of the First Schedule from such payment. (2) If the agent retains Commission or brokerage from any amount remitted by him to the principal, he shall be deemed to have been paid the commission or brokerage by the principal and the principal shall collect advance tax from the agent. (3) Where any tax is collected from a person under sub-section (1), the tax so collected shall be the final tax on the income of such persons.] 5[233A. Collection of tax by a stock exchange registered in Pakistan.- (1) A stock exchange registered in Pakistan shall collect advance tax,- 1 Substituted by the Finance Act, 2005. The substituted section 233 read as follows: “233. Brokerage and Commission.- (1) Where any payment on account of brokerage or commission is made by the Federal Government, a Provincial Government, a local authority, a company or an association of persons A[constituted by, or under, any law] (hereinafter called the “principal”) to any person B[other than travel agents and insurance agents] (hereinafter called the “agent”), the principal shall deduct advance tax at the rate specified in Part IV of the First Schedule from such payment. (2) If the agent retains commission or brokerage from any amount remitted by him to the principal, he shall be deemed to have been paid the commission or brokerage by the principal and the principal shall collect advance tax from the agent. C[(3) Where any payment on account of brokerage or commission is made by the principal to a travel agent or an insurance agent, the principal shall deduct advance tax at the rate specified in Part IV of the First Schedule from such payment.] D[(4) Where any tax is collected from a person under sub-section (1) or sub-section (3), the tax so collected shall be the final tax on the income of such persons.]” A Inserted by the Finance Act, 2003. B Inserted by the Finance Act, 2004. C Added by the Finance Act, 2004. D Added by the Finance Act, 2004. Â SECTION 7 OF IT CIRCULAR DATED THE 27TH JUNE, 2006 Brokerage or commission was subject to withholding tax as below:5% of the amount of the payment • In the case of indenting commission agents, advertising agents and yarn dealers. • In the case of others 10% Tax deducted on aforesaid commission was the final discharge of tax liability. Withholding tax rate of commission including indenting commission and yarn dealers commission has been made uniform @ 10%. Advertising agents will, however, be liable @ 5% under clause (26) of Part II of Second Schedule. Under the previous law, final tax regime is applicable to commission/brokerage received by resident agents only. The law has been amended to provide similar treatment to non-residents also. Income Tax Cir. No. 1 dated the 1st July, 2006 WITHHOLDING TAX ON COMMISSION AND BROKERAGE [Section 233] Brokerage or commission was subject to withholding tax as below:5% of the amount of the payment • In the case of indenting commission agents, advertising agents and yarn dealers. • In the case of others 10% Tax deducted on aforesaid commission is the final discharge of tax liability. In order to bring clarity in law and to provide uniformity in tax rate, withholding tax rate on commission including indenting commission and yarn dealers commission has been made uniform @ 10%. Advertising agents will, however, be liable @ 5% under clause (26), Part II of Second Schedule. Furthermore, previously, the final tax regime was applicable to commission/brokerage received by resident agents only. In order to remove the anomaly, the law has been suitably amended to provide similar treatment to non-residents also. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. TAX ON BROKERAGE AND COMMISSION. [Section 233] Under section 233 of the Income Tax Ordinance 2001, brokerage and commission paid to any person is subject to withholding tax at the rates specified in the First Schedule. Section 233 needed simplification/re-writing since insertion of some inclusions for the purpose of application of reduced rate in the past had made it complicated to some extent. The needful has been done without bringing any change in the effect. 2 Substituted for “local authority” by General Amendment issued by the Finance Act, 2008. 3 Word “resident” omitted by the Finance Act, 2006. 4 Words inserted vide the Finance Act, 2010 5 Inserted by the Finance Act, 2004. EXPLANATION ISSUED VIDE CIRCULAR No. 2 DATED THE 26TH MARCH, 2009It has, clarified that the Member would certify the quantum of tax withheld from each person traded through him and shall furnish a statement, to the concerned Director General, RTO, for the verification of claim of the taxpayers who traded the shares through him. So, the seller is entitled to take the credit of the tax so withheld as well as the member in respect of the shares owned by him. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008TREATMENT OF WITHHOLDING TAX IN RESPECT OF MEMBERS OF REGISTERED STOCK EXCHANGES – (Section 233A). Tax collected under clauses (a) and (b) of sub-section (1) of section 233A, by the Registered Stock Exchanges from the Members @ 0.1% on purchase value and @ 0.1% on the sale value of shares, in lieu of commission income of the Member was final tax. Under clause (c), 2010 – 2011 190 The Income Tax Ordinance, 2001 (a) at the rates specified in Division IIA of Part IV of First Schedule from its Members on purchase of shares in lieu of 1[tax on] the commission earned by such Members; (b) at the rates specified in Division IIA of Part IV of First 2[Schedule] from its Members on sale of shares in lieu of 3[tax on] the commission earned by such Members; (c) from its 4[Members] in respect of trading of shares by the Members at the rates specified in Division IIA of Part IV of First Schedule; and (d) from its 5[Members] in respect of financing of carryover trades [6] in share business at the rate specified in Division IIA of Part IV of First schedule. (2) 7[The tax collected under clauses (a) to (c) of sub-section (1) shall be 8[adjustable].] 234. 9[Tax on motor vehicles].- (1) Any person 10[at the time of] collecting motor vehicle tax shall also collect advance tax at the rates specified in Part IV of the First Schedule. sub-section (1) of section 233A, tax @ 0.1% is also collected on the traded value of shares for adjustment against income of the Member from trading of shares. However, taxes collected under all the three categories did not invariably match with the commission and business income of these taxpayers. 30.2 Sub-section (2) of section 233A, has, therefore, been amended to make all the three categories falling under clauses (a), (b) and (c) of the aforesaid section as minimum tax against commission income and business income respectively. Now they will have to file annual return of income accordingly. 1 Words inserted by the Finance Act, 2007. 2 The word “schedule” substituted by the Finance Act, 2005. 3 Words inserted by the Finance Act, 2007. 4 The word “Member” substituted by the Finance Act, 2005. 5 The word “Member” substituted by the Finance Act, 2005. 6 Word “(Badla)” omitted by the Finance Act, 2008. 7 Substituted for “The tax collected under clause (a) and clause (b) of sub-section (1) shall be a final tax.” By the Finance Act, 2008. 8 Substituted for “minimum tax” vide the Finance Act, 2010. 9 Substituted for “Transport business” by the Finance Act, 2008. EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008RATIONALIZATION OF WITHHOLDING TAX COLLECTED AT THE TIME OF RENEWAL OF REGISTRATION OF PRIVATE MOTOR CARS AND REGISTRATION OF NEW CAR/JEEP– (Sections 234 and 231B). As per the then provisions of section 234, withholding tax ranging from Rs.500 to Rs.3000 was collected, from private motor cars at the time of renewal of registration on the basis of engine capacity. These rates were originally introduced in 1992. Due to inflation, prices of cars have substantially increased but there was no corresponding increase in the tax rates. The withholding tax rates, fixed on the basis of engine capacity have, therefore, been revised upward. However, the tax so collected shall remain adjustable as before against final tax liability of owner of the cars. 31.2 WHT to be paid under section 234 at the time of annual renewal of registration of motor cars or jeeps is as under:Engine Capacity Amount of Tax (a) upto 1000cc 750 (b) 1001cc to 1199cc 1250 (c) 1200 to 1299cc 1750 (d) 1300cc to 1599cc 3000 (e) 1600cc to 1999cc 4000 (f) 2000cc and above 8000 31.3 Previously, every manufacturer or authorized dealer of Motor cars was required under section 231B to collect advance tax @ 2.5% of the value of the vehicle. The manufacturer used to collect such tax at the time of booking of a car whereas delivery of the vehicle was normally made after a period of 3 to 6 months. In order to facilitate the taxpayers (buyers of vehicles) now such tax shall be paid by the owner at the time of registration of car or jeep by the Motor Vehicle Registration Authority. 31.4 Advance tax to be paid under section 231B at the time of registration of a new motor car or jeep by the owner would be as under:Engine Capacity Amount of Tax upto 850cc Rs.7,500 851cc to 1000cc Rs.10,500 1001cc to 1300cc Rs.16,875 1301cc to 1600cc Rs.16,875 1601cc to 1800cc Rs.22,500 1801cc to 2000cc Rs.16,875 Above 2000cc Rs.50,000 31.5 The provisions of section 231B, shall, however, not be applicable in the case of – (i) the Federal Government or the Provincial Governments; and (ii) a foreign diplomat or a diplomatic mission in Pakistan. 10 Inserted by the Finance Ordinance, 2002 2010 – 2011 191 The Income Tax Ordinance, 2001 (2) If the motor vehicle tax is collected in instalments, the advance tax may also be collected in instalments in like manner. 1[(2A) In respect of motor cars used for more than ten years in Pakistan, no advance tax shall be collected after a period of ten years.] (3) In respect of a passenger transport vehicle with registered seating capacity of ten or more persons, advance tax shall not be collected after a period of ten years from the first day of July of the year of make of the vehicle. (4) In respect of a goods transport vehicle with registered laden weight of 2[ ]less than 8120 kilograms, advance tax shall not be collected after a period of ten years from the date of first registration of vehicle in Pakistan. (5) Where tax is collected from any person being the owner of goods transport vehicle, the tax so collected shall be the final tax on the income of such person 3[from plying, or hiring out, of such vehicle]. 4[234A. Í CNG Stations.— (1) There shall be collected advance tax at the rate specified in Division VIB of Part III of the First Schedule on the amount of gas bill of a Compressed Natural Gas station. (2) The person preparing gas consumption bill shall charge advance tax under sub-section (1) in the manner gas consumption charges are charged. (3) The tax collected under this section shall be a final tax on the income of a CNG station arising from the consumption of the gas referred to in sub-section (1). (4) The taxpayers shall not be entitled to claim any adjustment of withholding tax collected or deducted under any other head, during the tax year.] 5235. Electricity consumption.- (1) There shall be collected advance tax at the rates specified in Part-IV of the First Schedule on the amount of electricity bill of a commercial or industrial consumer. Inserted by the Finance Ordinance, 2002. Words “2030 kilograms or more but” omitted by the Finance Act, 2003 3 Inserted by the Finance Ordinance, 2002. 4 Section 234A inserted by the Finance Act, 2007. Í EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. PRESUMPTIVE TAX REGIME FOR CNG STATIONS. [Section 234A] All gas marketing companies shall collect advance tax at the rate of 4% of the amount of gas bill with effect from first day of July 2007. The tax so collected will be final tax on the income of CNG stations operators arising from sale of gas. Further, CNG station operators will not be entitled to claim any adjustment of withholding tax collected or deducted under any other head during a tax year. The provisions of this section shall be applicable from the year 2008. 5 INCOME TAX Circular No. 8 dated the the June 30, 2010 In order to rationalize the advance tax regime on electricity bills, the Finance Act 2010 has brought in few amendments in Division-IV of Part-IV of First Schedule to the Income Tax Ordinance 2001. The new amendments are explained as follows: (i) In case of the minimum tax rate slab where the monthly electricity bill does not exceed Rs.400/-. No advance tax under section 235 shall be deductible. Earlier advance tax on monthly electricity bills not exceeding Rs.400 was chargeable @ Rs.60/-; and (ii) In case of the maximum tax rate slab where the monthly electricity bill exceeds Rs.20,000/-, advance tax under section 235 shall be deductible at a reduced rate of 5% only in case of industrial consumers. However, in the case of commercial consumers the advance tax shall continue to be deductible @ 10%. (iii) These amendments in the rates of advance tax under section 235 and as provided in Division-IV of Part-IV of First Schedule to the Income Tax Ordinance 2001, shall be effective from 1st July, 2010. EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009TREATMENT OF ADVANCE TAX COLLECTED ON MONTHLY ELECTRICITY BILLS IN THE CASES OF NON-CORPORATE TAXPAYERS. Section 235. 52.1 As a result of amendment made through Finance Act, 2008, the rate of advance tax collection on monthly bills of industrial and commercial consumers exceeding Rs. 20,000/- was raised to 10% of the amount of bill. In the case of non-corporate taxpayers it was to be treated as minimum tax and no refund was allowed to such persons. However, in the case of a company, tax collected was adjustable against final tax. 52.2 The said amendment has led to litigations in the courts on the ground that charging of tax on utility bills being the expenditure was against the natural justice as well as constitution of Islamic Republic of Pakistan. The courts while declaring such tax as legal, however, have directed to interpret the provision in a manner to allow adjustment of tax collected from non-corporate taxpayers exceeding the minimum tax payable as per law. 52.3 In order to give effect to the courts’ orders, sub-section (4) of section 235 has been amended to provide as under. a) in the case of a taxpayer other than a company, tax collected upto bill amount of thirty thousand rupees per month shall be treated as minimum tax on the income of such persons and no refund shall be allowed; 1 2 2010 – 2011 The Income Tax Ordinance, 2001 192 b) in the case of a taxpayer other than a company, tax collected on monthly bill over and above thirty thousand rupees per month shall be adjustable. c) In the case of a company, tax collected shall be adjustable against tax liability. Example-I For tax year 2010 1 A taxpayer (other than a company) having electricity bill amount upto Tax withheld under sub-section (1) of . thirty thousand rupees per month section 235 read with Division IV of Part IV of the First Schedule = Rs.3000 per month X 12 = Rs.36000 per annum 2 Income as per return filed under section 114 Rs.400,000 . 3 . Tax payable as per paragraph 1 of Division I of Part I of the First Schedule @ 7.5% on the declared income Rs.30,000 4 . Tax withheld under sub section (1) read with provisions of sub-section (4) of section 235 shall be the ‘minimum tax’ Rs.36000 1 . Example-II For tax year 2010 A taxpayer (other than a company) having electricity bill amount upto thirty thousand rupees per month Tax withheld under sub-section (1) of section 235 read with Division IV of Part IV of the First Schedule = Rs.3000 per month X 12 = Rs.36000 per annum Rs.500,000 2 . Income as per return filed under section 114 3 . Tax payable as per paragraph 1 of Division I of Part I of the First Schedule @ 10% on the declared income Rs.50,000 4 . Further tax payable as per Ordinance by the taxpayer Rs.14000 1 . Example-IV For tax year 2010 A taxpayer (other than a company) having electricity bill amount over and above thirty thousand rupees per month – Say forty thousand rupees per month Tax withheld under sub-section (1) of section 235 read with Division IV of Part IV of the First Schedule = Rs.4000 per month X 12 = Rs.48000 per annum Rs.500,000 2 . Income as per return filed under section 114 3 . Tax payable as per paragraph 1 of Division I of Part I of the First Schedule @ 10% on the declared income Rs.50,000 4 . Tax payable under the Ordinance Rs.50,000 5 . Tax collected withheld under sub-section (1) of section 235 read with Division IV of Part IV of the First Schedule Rs.48,000 6 . Balance tax payable by the taxpayer Rs.2000 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008WITHHOLDING TAX THROUGH ELECTRICITY BILLS. [Section 235(4)]. Retailers and whole sellers constitute 19.2% of GDP but contribution of this sector towards income tax is not more than 2% which, obviously, means under taxation. Withholding tax on electricity bills of commercial and industrial consumers was collected every month at the rates ranging from Rs.60 to Rs.2000 depending upon the amount of bill. The average rate of withholding tax collected on electricity bills upto to Rs.4500 was about 14% of the bill amount whereas this percentage on the higher amount of bills’ upto Rs.20,000 per month was about 9%. 32.2 The provisions of sub-section (4) of section 235 of the Ordinance have been amended whereby withholding tax on bill amount upto Rs.20,000 per month would be collected as per the existing treatment, whereas, for the bill amount exceeding Rs.20,000 p.m. withholding tax would be collected @ 10% in respect of all commercial and industrial consumers. The tax so collected would be adjustable against final tax liability. 32.3 However, no tax on electricity bills would be collected from the following five sectors falling under zero rating regime of Sales Tax of exporters-cummanufacturers as per provisions of clause (66) of Part IV of the 2nd Schedule to the Ordinance: (i) carpets; (ii) leather and articles thereof including artificial leather footwear; (iii) surgical goods; (iv) sports goods; and 2010 – 2011 193 The Income Tax Ordinance, 2001 (2) The person preparing electricity consumption bill shall charge advance tax under sub-section (1) in the manner electricity consumption charges are charged. (3) Advance tax under this section shall not be collected from a person who produces a certificate from the Commissioner that his income during tax year is exempt from tax. 1[(4) under this section,- (a) in the case of a taxpayer other than a company, tax collected upto bill amount of thirty thousand rupees per month shall be treated as minimum tax on the income of such persons and no refund shall be allowed; (b) in the case of a taxpayer other than a company, tax collected on monthly bill over and above thirty thousand rupees per month shall be adjustable; and (c) in the case of a company, tax collected shall be adjustable against tax liability.] 2236. Telephone users.- (1) Advance tax at the rates specified in Part IV of the First Schedule shall be collected on the amount of – (a) telephone bill of a subscriber; [3] (b) prepaid cards for [4]telephones5[; and (c) sale of units through any electronic medium or whatever form.] (2) The person preparing the telephone bill shall charge advance tax under sub-section (1) in the manner telephone charges are charged. (3) The person issuing or selling prepaid cards for [6] telephones 7 shall [collect] advance tax under sub-section (1) from the purchasers at the time of issuance or sale of cards. 8[(3A) The person issuing or selling units through any electronic medium or whatever form shall collect advance tax under sub-section (1) from the purchaser at the time of issuance or sale of units.] (4) Advance tax under this section shall not be collected from Government, a foreign diplomat, a diplomatic mission in Pakistan, or a person who produces a certificate from the Commissioner that his income during the tax year is exempt from tax. (v) textile and articles thereof. 1 Sub-section (4) substituted vide the Finance Act, 2009, the replaced sub-section read as follows: 1[(4) The tax collected under this section 1[up to bill amount of twenty thousand rupees per month] shall be minimum tax on the income of a person (other than a company). There shall be no refund of the tax collected under this section, unless the tax so collected is in excess of the amount for which the taxpayer is chargeable under this Ordinance in the case of a company.] 1 Sub section (4) added by the Finance Act, 2007. This sub-section shall be applicable with effect from tax year 2008. EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. 1 Words inserted by the Finance Act, 2008. 2 EXPLANATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008APPLICATION OF A UNIFORM RATE OF WITHHOLDING TAX ON LAND LINE TELEPHONE BILLS – (Section 236). Withholding tax under section 236 read with Division V, Part IV, of the First Schedule was collected on monthly telephone bills exceeding Rs.1000 at different rates, the maximum rate of collection was Rs.300 per month. 33.2 By virtue of the amendment made in Division V of Part IV of the First Schedule to the Ordinance, all telephone subscribers have been subjected to a uniform rate of withholding tax @ 10% on the bills exceeding Rs.1000 per month. The tax so collected is adjustable against final tax as before. 3 Word “and” omitted vide the Finance Act, 2010. 4 The word “mobile“ omitted by the Finance Ordinance, 2002. 5 Inserted vide the Finance Act, 2010. 6 The word “mobile” omitted by the Finance Ordinance, 2002. 7 Substituted for “called” by the Finance Act, 2003 8 Sub-section (3A) inserted vide the Finance Act, 2010. 2010 – 2011 194 The Income Tax Ordinance, 2001 1[236A. Advance tax at the time of sale by auction.- (1) Any person making sale by public auction, of any property or goods confiscated or attached 2[(including property or goods confiscated or attached)] either belonging to or not belonging to the Government, local Government, any authority, a company, a foreign association declared to be a company under sub-clause (vi) of clause (b) of sub-section (2) of section 80, or a foreign contractor or a consultant or a consortium or Collector of Customs or Commissioner of Income Tax or any other authority, shall collect advance tax, computed on the basis of sale price of such property and at the rate specified in Division VIII of Part IV of the First Schedule, from the person to whom such property or goods are being sold. (2) The credit for the tax collected under sub-section (1) in that tax year shall, subject to the provisions of section 147, be given in computing the tax payable by the person purchasing such property in the relevant tax year or in the case of a taxpayer to whom section 98B or section 145 applies, the tax year, in which the "said date" as referred to in that section, falls or whichever is later. Explanation.- For the purposes of this section, sale of any property includes the awarding of any lease to any person, including a lease of the right to collect tolls, fees or other levies, by whatever name called.] 3[236B. Advance tax on purchase of air ticket.- (1) There shall be collected advance tax at the rate specified in Division IX of Part IV of the First Schedule, on the purchase of gross amount of domestic air ticket. 1 INCOME TAX Circular No. 10 dated the the July 16, 2010 ADVANCE TAX AT THE TIME OF SALE BY AUCTION [Section 236A]. In order to clarify the ambiguity regarding the applicability of the provisions of section 236A of the Income Tax Ordinance, 2001, the expression “including” has been inserted to clarify that advance tax on sale through auction is applicable on the sale of property or goods, including property or goods which are confiscated or attached and sold through auction, tender etc. Remaining provisions of section 236A of the Income Tax Ordinance, 2001 remains the same. EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009ADVANCE TAX AT THE TIME OF SALE THROUGH AUCTION. [Section 236A] 53.1 In the past under section 50(7A) of the repealed Income Tax Ordinance, 1979, any person making sale by public auction of any property belonging to the Government, a Local Authority etc. was required to collect tax @ 3% of the sale price of such property. No such provision was, however, available in the Income Tax Ordinance, 2001. Considering the revenue importance, a new sub-section 236A has been inserted to provide that any person making sale through public auction, of any property or goods confiscated or attached either belonging to or not belonging to the: a) Government b) Local Government c) any authority d) a company e) a foreign association declared to be company under sub-clause (vi) of clause (b) of sub-section 2) of section 80, f) a foreign contractor g) a consultant h) a consortium i) Collector of Customs j) Commissioner of income tax or k) any other authority shall collect advance tax, computed on the basis of sale price of such property and at the rate specified in Division VIII of Part IV of the First Schedule from the person to whom such property or goods are being sold. 53.2 The tax so collected is adjustable and taxpayer will be entitled to claim credit in the relevant tax year. 53.3 The term “sale of property” has been explained to include the award of any lease to any person, including a lease of the right to collect tolls, fees or other levies by whatever name called. Section 236A inserted vide the Finance Act, 2009. 2 Words inserted vide the Finance Act, 2010 3 Section 236B inserted vide the Finance Act, 2010. INCOME TAX Circular No. 6 dated the the June 30, 2010 Through Finance Act 2010, a new section 236B has been inserted in the Income Tax Ordinance 2001. The new enactment provides that person preparing the air ticket shall charge advance tax on the gross amount of domestic air ticket, at the time of its purchase. 2. Accordingly a new Division-IX has been inserted in Part-IV of the First Schedule to the Income Tax Ordinance 2001, which provides that advance tax under section 236B shall be charged @ 5% of the gross amount of domestic air ticket. 3. This enactment shall be effective from 1st July 2010 onwards. INCOME TAX Circular No. 10 dated the the July 16, 2010 WITHHOLDING TAX ALONG WITH AIR TICKETS FOR DOMESTIC TRAVEL [Section 236B]. Through Finance Act 2010, a new section 236B has been inserted in the Income Tax Ordinance 2001. The new enactment provides for charge of adjustable withholding income tax on purchase of tickets for inland air travel:This tax shall be collected @ 5% on gross amount of air ticket for inland travel along with the payment for the air ticket. This advance tax shall be adjustable against the overall tax liability of the purchaser of such air ticket. This tax shall not be charged on purchase of air ticket by the Federal / Provincial Governments and by a person who produces a certificate from the relevant Commissioner Inland Revenue that income of such person during the tax year is exempt. Tax deducted under this section shall be paid to the relevant Commissioner Inland Revenue as required under the Law. 2010 – 2011 195 The Income Tax Ordinance, 2001 (2) The person preparing air ticket shall charge advance tax under sub-section (1) in the manner air ticket charges are charged.] CHAPTER XIII MISCELLANEOUS 237. Power to make rules.- (1) The Federal Board of Revenue may, by notification in the official Gazette, make rules for carrying out 1[ ] the purposes of this Ordinance. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:– (a) the manner in, and procedure by, which the income, profits and gains chargeable to tax and the tax payable thereon under this Ordinance shall be determined in the case of – (i) income derived partly from agriculture and partly from other business; or (ii) non-resident persons; 2[(ab) ascertainment or determination of any income or class of income to be included in the total income of a taxpayer and any deduction from such income;] (b) fees and other charges to be paid in respect of any matter referred to in this Ordinance; (c) anything which is to be or may be prescribed under this Ordinance; (d) the procedure for furnishing returns and other documents as required under this Ordinance, including on computer media or through electronic medium or for issuance of orders or notices, or levy of 3[default surcharge] or penalty through electronic medium; 4[(da) the procedure for approval of a non-profit organization;] (e) contain provisions of a saving or transitional nature consequent upon the making of this Ordinance; and (f) penalties for the contravention of the rules made under this Ordinance. (3) The power to make rules conferred by this section shall be, except on the first occasion of the exercise thereof, subject to the condition of previous publication. (4) Where rules made under this section – (a) adversely affect a person; (b) are of a transitional nature; and (c) are made within twelve months after commencement of this Ordinance, these may provide that they shall take effect from the date on which this Ordinance comes into force or a later date. Tax deducted under this section shall be allowed to be adjusted against the tax liability of the person whom such ticket for inland air travel is issued. However, in cases where payment is made by the employer/parents of the dependents travelers, such adjustment can be claimed by the employer/parents. 1 The word “of” omitted by the Finance Act, 2005. 2 Clause (ab) inserted by the Finance Act, 2003 3 Substituted for “additional tax” vide the Finance Act, 2010. 4 Clause (da) inserted by the Finance Act, 2003 2010 – 2011 196 The Income Tax Ordinance, 2001 1[237A. Electronic record.—(1) The Board may require any person to use its information system and electronic resource, in order to replace or supplement, its manual business processes by automated business processes and substitute its paper based records by electronic record. (2) Electronic record generated, maintained, issued, served, received, filed or requisitioned through the electronic resource of the Board shall by itself sufficiently and conclusively prove its validity, authenticity and integrity and shall be treated to have been done so according to the provisions of this Ordinance.] 238. Repeal.- The Income Tax Ordinance, 1979 (XXXI of 1979), shall stand repealed on the date this Ordinance comes into force in pursuance of sub-section (3) of section 1. 239. (Savings.- 2[(1) Subject to sub-section (2), in making any assessment in respect of any income year ending on or before the 30th day of June, 2002, the provisions of the repealed Ordinance in so far as these relate to computation of total income and tax payable thereon shall apply as if this Ordinance had not come into force.] [(2) The assessment, referred to in sub-section (1), shall be made by an income tax authority which is competent under this Ordinance to make an assessment in respect of a tax year ending on any date after the 30th day of June, 2002, and in accordance with the procedure specified in section 59 or 59A [or 61] or 62 or 63, as the case may be, of the repealed Ordinance.] [(3) The provisions of [sub-sections] (1) and (2) shall apply, in like manner, to the imposition or charge of any penalty, 7[default surcharge] or any other amount, under the repealed Ordinance, as these apply to the assessment, so however that procedure for such imposition or charge shall be in accordance with the corresponding provisions of this Ordinance.] (4) Any proceeding under the repealed Ordinance pending on the commencement of this Ordinance before any income tax authority, the Appellate Tribunal or any Court by way of appeal, reference, revision or prosecution shall be continued and disposed of as if this Ordinance has not come into force. (5) Where the period prescribed for any application, appeal, reference or revision under the repealed Ordinance had expired on or before the commencement of this Ordinance, nothing in this Ordinance shall be construed as enabling such application, appeal, reference or revision to be made under this Ordinance by reason only of the fact that a longer period is specified or provision for an extension of time in suitable cases by the appropriate authority. (6) Any proceeding for [8] prosecution in respect of an assessment for an income year ending on or before the 30th day of June 2002 shall be taken and continued as if this Ordinance has not come into force. Section 237A inserted by the Finance Act, 2008. EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. POWERS TO AMEND NOTIFICATIONS etc. [Section 239] In section 239, notifications etc issued under the repealed Ordinance were saved unless revoked, cancelled or repealed by, or under, this Ordinance. Sub-sections (12) and (13) have been amended to provide that such notifications etc can be amended or modified as well. 2 Substituted by the Finance Ordinance, 2002. The original sub-section (1) read as follows: “(1) The repealed Ordinance shall continue to apply to the assessment year ending on the 30th day of June 2003. “ 3 Substituted by the Finance Ordinance, 2002. The original sub-section (2) read as follows: “(2) In making any assessment in respect of any income year ending on or before the 30th day of June 2002, the provisions of the repealed Ordinance relating to the computation of total income and the tax payable thereon shall apply as if this Ordinance has not come into force.” 4 Word and figure inserted by the Finance Act, 2003 5 Substituted by the Finance Ordinance, 2002. The original sub-section (3) read as follows: “(3) Where any return of income has been furnished by a person for any assessment year ending on or before the 30th day of June 2003, proceedings for the assessment of the person for that year shall be taken and continued as if this Ordinance has not come into force. “ 6 The word “sub-section” substituted by the Finance Act, 2005. 7 Substituted for “additional tax” vide the Finance Act, 2010. 8 The words “the imposition of penalty or” omitted by the Finance Ordinance, 2002. 1 Ê 2010 – 2011 197 The Income Tax Ordinance, 2001 (7) Any income tax, super tax, surcharge, penalty, 1[default surcharge], or other amount payable under the repealed Ordinance may be recovered under this Ordinance, but without prejudice to any action already taken for the recovery of the amount under the repealed Ordinance. (8) Any election or declaration made or option exercised by any person under any provision of the repealed Ordinance and in force immediately before the commencement of this Ordinance shall be treated as an election or declaration made, or option exercised under the corresponding provisions, if any, of this Ordinance. (9) Anything done or action taken under the repealed Ordinance in so far as it is not inconsistent with the 2[provisions] of this Ordinance shall, without prejudice to anything already done or any action already taken, be treated as having been done or taken under this Ordinance. (10) Any agreement entered into, appointment made, approval given, recognition granted, direction, instruction, notification, notice, order or rule issued or made under any provision of the repealed Ordinance and in force or valid at the commencement of this Ordinance shall, so far as it is not inconsistent with the corresponding provision of this Ordinance or any agreement, appointment entered into, approval given, recognition granted, direction, instruction, notification, notice, order or rule issued or made under this Ordinance, be treated as entered into, made, given, granted or issued, as the case may be, under that corresponding provision and shall unless revoked, cancelled or repealed by, or under, this Ordinance, continue in force accordingly.* (11) Any appointment, act of authority or other thing made or done by any authority or person and subsisting or in force at the commencement of this Ordinance which would have been made or done under any substantially corresponding provision of this Ordinance by any authority or person other than the one specified in the repealed Ordinance, or in any manner other than as specified in the repealed Ordinance shall continue in force and have effect as if it has been made or done under the corresponding provision of this Ordinance by the authority or person, or in the manner specified in the corresponding provision as if such provision had been in force when it was made or done. 3[(12) Any notification issued under section 50 of the repealed Ordinance and in force on the commencement of this Ordinance shall continue to remain in force, unless 4[amended, modified], cancelled cancelled or repealed by, or under, this Ordinance.] 5[(13) The authority which issued any notification, notice, direction or instruction, or made any rule, agreement or appointment, or granted any approval or recognition, referred to in sub-sections (10) and (12), shall have the power to 6[amended, modified], cancel or repeal any such notification, notice, direction, direction, instruction, rule, agreement, appointment, approval or recognition.] 7[(14) Any yield from National Saving Schemes of Directorate of National Savings where investment was made on or before 30th June, 2001 and any income derived from Mahana Amdani Account where monthly instalment does not 8[exceed] one thousand rupees shall continue to remain exempt and any person paying such yield or income shall not deduct tax under section 151 therefrom and the recipient of such yield or income shall not be required to produce an exemption certificate under section 159 in support of the said exemption.] Substituted for “additional tax” vide the Finance Act, 2010. The word “provision” substituted by the Finance Act, 2005. 3 Substituted by the Finance Ordinance, 2002. The original sub-section (12) read as follows: “(12) Clause 77C of Part I of the First Schedule of the repealed Ordinance shall continue to apply to the yield on National Savings Deposit Certificates issued before 1st July, 2001 and a person paying yield on such a Certificate shall not deduct tax under section 151 from the payment.” 4 The word “revoked” substituted by the Finance Act, 2005. 5 Substituted by the Finance Ordinance, 2002. The original sub-section (13) read as follows: “ (13) There is no requirement for the holder of Certificate to which sub-section (14) applies to acquire an exemption certificate under section 159 to give effect to the exemption.“ 6 The word “revoke” substituted by the Finance Act, 2005. 7 Substituted for “ “7[(14) Clause (77C) of Part I of the First Schedule of the repealed Ordinance shall continue to apply to the yield on National Savings Deposit Certificates issued before 1st July, 2001, and a person paying yield on such a Certificate shall not deduct tax under section 151 from the payment, and the holder of such Certificate shall not be required to acquire an exemption certificate under section 159 to give effect to the said exemption.]” by the Finance Act, 2003 8 The word “exceeds” substituted by the Finance Act, 2005. 1 2 2010 – 2011 (15) 2002. 198 The Income Tax Ordinance, 2001 Section 107AA of the repealed Ordinance shall continue to apply until the 30th day of June, (16) The Income Tax Rules made under the repealed Ordinance, on the valuation of perquisites shall continue to apply 1[in respect of any income year ending on or before] the 30th day of June 2002. (17) Item 8(5)(h) of the Third Schedule to the repealed Ordinance shall continue to apply to assets covered by the item. 2[ ] 3[239A. Transition to Federal Board of Revenue.— Any reference to the Federal Board of Revenue, wherever occurring, in this Ordinance and the rules made thereunder and Notifications, Orders, or any other instrument issued thereunder shall be construed as a reference to the Federal Board of Revenue on the commencement of the Federal Board of Revenue Act, 2007.] 4[239B. Reference to authorities.- Any reference to the Regional Commissioner of Income Tax, Commissioner of Income Tax, Commissioner of Income Tax (Appeals) and Taxation Officer, wherever occurring, in this Ordinance and the rules made thereunder and notifications, orders, circulars or clarifications or any instrument issued thereunder shall be construed as reference to the Chief Commissioner Inland Revenue, Commissioner Inland Revenue, Commissioner Inland Revenue (Appeals) and officer of Inland Revenue, respectively.] 240. Removal of difficulties.- (1) Subject to sub-section (2), if any difficulty arises in giving effect to any of the provisions of this Ordinance, the Federal Government may, by notification in the official Gazette, make such order, 5[not] inconsistent with the provisions of this Ordinance, as may appear to it to be necessary for the purpose of removing the difficulty. (2) [6] Substituted for the word “until” by the Finance Ordinance, 2002. Sub-section (18) omitted by the Finance Act, 2003. The omitted sub-section (18) read as under:“(18) In this section, ‘Income Tax authority’ means an Income Tax authority as specified in section 3 of the repealed Ordinance.” Earlier this was substituted by Finance Ordinance, 2002. The original sub-section (18) read as follows: “(18) In this section, “assessment year” means assessment year as defined in the repealed Ordinance; “income tax authority” means income tax authority as defined in section 3 of the repealed Ordinance; “income year” means income year as defined in the repealed Ordinance; and “repealed Ordinance” means the Income Tax Ordinance, 1979 (XXXI of 1979).” 3 Section 239A inserted by the Finance Act, 2007. 4 Section 239B inserted vide the Finance Act, 2010. 5 Substituted for the word “no” by the Finance Ordinance, 2002. 6 Sub-section (2) omitted vide the Finance Act, 2010, the omitted sub-section read as follows: No such power shall be exercised under sub-section (1) after the 30th day of June 2004. 1 2 2010 – 2011 199 The Income Tax Ordinance, 2001 2010 – 2011 200 The Income Tax Ordinance, 2001 1st Sch. P. I 201 The Income Tax Ordinance, 2001 THE FIRST SCHEDULE Ê PART I RATES OF TAX (See Chapter II) (Division I Rates of Tax for Individuals [1] Subject to 2[3 [clause] (1A) [4] ], the rates of tax imposed on the taxable income of every individual a salaried taxpayer] [6] to which sub-section (1) of section 92 applies shall be as set out in the following table, namely:– 1. 5[except 7[TABLE Ê PLEASE REFER EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005 AT ANNEXURE’S PAGE NO. 22 Â Income Tax Cir. No. 1 dated the 1st July, 2006 SIMPLIFICATION OF SALARY TAXATION: ENHANCEMENT IN BASIC EXEMPTION LIMIT [First Schedule, Part I, Division I] Following the policy of making tax laws simpler wherever possible, the method of valuation and taxation of perquisites etc. has been rationalized. The basic exemption limit has been enhanced from Rs.100,000 to Rs.150,000. However, where the taxpayer is a woman the basic exemption limit will be Rs.200,000/-. All allowances and perquisites shall be added to the salary income. (i) The value of house shall be taken at the amount equal to the allowance which the employee would have received in cash if accommodation was not provided, or 45% of minimum time scale (or basic salary ) whichever is less; (ii) The valuation of conveyance facility is restricted to 10% and 5% of value of car where the car is for totally personal use or partly personal use, respectively. The additions of all allowances and perquisites will be grossed up and tax rate as per Division I of Part I of the First Schedule will be applied to determine the tax liability of the salaried taxpayer. SIMPLIFIED TAX REGIME FOR NON-SALARIED TAXPAYERS. [First Schedule, Part I, Division I] A simple rate card has been evolved for non-salaried taxpayers and flat rates have been introduced to be applied to the taxable income of non-salaried individuals, depending upon the level of income. SPECIAL TAX CONCESSION FOR WOMEN. [First Schedule, Part I, Division I] In line with the Government policy of women empowerment, the basic threshold in the case of salaried and non salaried women taxpayers has been enhanced to Rs. 200,000 and Rs. 125,000 respectively for tax year 2007. 1 Words “and Association of Persons” omitted vide the Finance Act, 2010. 2 The word, brackets and figure “clause (2)” substituted by the Finance Act, 2005. It was substituted for the words and figures “clauses 2 and 3” by the Finance Ordinance, 2002. 3 Substituted for the word “clauses” by the Finance Act, 2006. 4 Word, brackets and figure “and (2)” omitted by the Finance Act, 2006. 5 Inserted by the Finance Act, 2005. 6 Words “or association of persons” omitted vide the Finance Act, 2010. 7 Table substituted vide the Finance Act, 2010, earlier it substituted vide FA 2006, The old table with all past tables are given below: S. Taxable income. Rate of No. tax. (1) (2) (3) 1 2 3 4 5 6 7 8 9 Where taxable income does not exceed Rs.100,000 Where taxable income exceeds Rs.100,000 but does not exceed Rs.110,000 Where taxable income exceeds Rs.110,000 but does not exceed Rs.125,000 Where taxable income exceeds Rs.125,000 but does not exceed Rs.150,000 Where taxable income exceeds Rs.150,000 but does not exceed Rs.175,000 Where taxable income exceeds Rs.175,000 but does not exceed Rs.200,000 Where taxable income exceeds Rs.200,000 but does not exceed Rs.300,000 Where taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 Where taxable income exceeds Rs.400,000 but does not exceed Rs.500,000 0% 0.50% 1.00% 2.00% 3.00% 4.00% 5.00% 7.50% 10.00% 1st Sch. P. I S. No. (1) 10 11 12 13 14 S. No. (1) 1 2 3 4 5 6 7 Taxable income. Rate of tax. (3) (2) Where taxable income exceeds Rs.500,000 but does not exceed Rs.600,000 Where taxable income exceeds Rs.600,000 but does not exceed Rs.800,000 Where taxable income exceeds Rs.800,000 but does not exceed Rs.10,00,000 Where taxable income exceeds Rs.10,00,000 but does not exceed Rs.13,00,000 Where the taxable income exceeds Rs.13,00,000 7[TABLE Taxable income. (2) Where taxable income does not exceed Rs.100,000 Where taxable income exceeds Rs.100,000 but does not exceed Rs.150,000 Where taxable income exceeds Rs.150,000 but does not exceed Rs.300,000 Where taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 Where taxable income exceeds Rs.400,000 but does not exceed Rs.700,000 Where taxable income exceeds Rs.700,000 Substituted by the Finance Act, 2004. The substituted Table read as follows: 2A[TABLE S. No. Taxable income (1) (2) 1. Where taxable income does not exceed Rs.80,000 2. Where taxable income exceeds Rs.80,000 but does not exceed Rs.150,000 3. Where taxable income exceeds Rs.150,000 but does not exceed Rs.300,000 4. Where taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 5. Where taxable income exceeds Rs.400,000 but does not exceed Rs.700,000 6. Where taxable income exceeds Rs.700,000 2A The Income Tax Ordinance, 2001 202 12.50% 15.00% 17.50% 21.00% 25.00% Rate of tax. (3) 0% 7.5% of the amount exceeding Rs. 100,000. 3,750 plus 12.5% of the amount exceeding Rs.150,000. 22,500 plus 20% of the amount exceeding Rs.300,000 42,500 plus 25% of the amount exceeding Rs.400,000 117,500 plus 35% of the amount exceeding Rs.700,000.] Rate of tax. (3) 0% 7.5% of the amount exceeding Rs.80,000. Rs. 5,250 plus 12.5% of the amount exceeding Rs.150,000. Rs. 24,000 plus 20% of the amount exceeding Rs.300,000 Rs. 44,000 plus 25% of the amount exceeding Rs.400,000 Rs. 119,000 plus 35% of the amount exceeding Rs.700,000 Earlier the table was substituted by the Finance Act, 2002. The substituted Table read as follows: TABLE S. No. Taxable income Rate of tax. ( (2) (3) 1 ) 1. Where taxable income does not exceed Rs.60,000 0% 2. Where taxable income exceeds Rs.60,000 but does not 7.5% of the amount exceeding Rs.60,000. exceed Rs.150,000 3. Where taxable income exceeds Rs.150,000 but does not Rs. 6,750 plus 12.5% of the amount exceed Rs.300,000 exceeding Rs.150,000. 4. Where taxable income exceeds Rs.300,000 but does not Rs. 25,500 plus 20% of the amount exceed Rs.400,000 exceeding Rs.300,000 5. Where taxable income exceeds Rs.400,000 but does not Rs. 45,500 plus 25% of the amount exceed Rs.700,000 exceeding Rs.400,000 6. Where taxable income exceeds Rs.700,000 Rs. 120,500 plus 35% of the amount exceeding Rs.700,000 1st Sch. P. I 1 2 3 4 5 6 203 The Income Tax Ordinance, 2001 Where taxable income does not exceed Rs.300,000 Where taxable income exceeds Rs.300,000 but does not exceed Rs.500,000 Where taxable income exceeds Rs.500,000 but does not exceed Rs.750,000 Where taxable income exceeds Rs.750,000 but does not exceed Rs.1,000,000 Where taxable income exceeds Rs.1,000,000 but does not exceed Rs.1,500,000 Where taxable income exceeds Rs.1,500,000 0% 7.50% 10% 15% 20% 25% 1[(1A) Where the income of an individual chargeable under the head “salary” exceeds fifty percent of his taxable income, the rates of tax to be applied shall be as set out in the following table namely: 2[TABLE Inserted by the Finance Act, 2005. Table substituted vide the Finance Act, 2010, earlier it was substituted vide the FA 2009, the replaced table read as follows: S.No. Taxable income Rate of tax ————————————————————————————————————————------------(1) (2) (3) ————————————————————————————————————————------------1. Where the taxable income does not exceed Rs.200,000, 0% 1 2 2. Where the taxable income exceeds Rs. 200,000 but does not exceed Rs. 250,000, 0.50% 3. Where the taxable income exceeds Rs. 250,000 but does not exceed Rs. 350,000, 0.75% 4. Where the taxable income exceeds Rs. 350,000 but does not exceed Rs. 400,000, 1.50% 5. Where the taxable income exceeds Rs. 400,000 but does not exceed Rs. 450,000, 2.50% 6. Where the taxable income exceeds Rs. 450,000 but does not exceed Rs. 550,000, 3.50% 7. Where the taxable income exceeds Rs. 550,000 but does not exceed Rs. 650,000, 4.50% 8. Where the taxable income exceeds Rs. 650,000 but does not exceed Rs.7 50,000, 6.00% 9. Where the taxable income exceeds Rs. 750,000 but does not exceed Rs. 900,000, 7.50% 10. Where the taxable income exceeds Rs. 900,000 but does not exceed Rs. 1,050,000, 9.00% 11. Where the taxable income exceeds Rs. 1,050,000 but does not exceed Rs. 1,200,000 10.00% 12. Where the taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 1,450,000 11.00% 13. Where the taxable income exceeds Rs. 1,450,000 but does not exceed Rs. 1,700,000 12.50% 14. Where the taxable income exceeds Rs. 1,700,000 but does not exceed Rs. 1,950,000 14.00% 15. Where the taxable income exceeds Rs. 1,950,000 but does not exceed Rs. 2,250,000 15.00% 16. Where the taxable income exceeds Rs. 2,250,000 but does not exceed Rs. 2,850,000 16.00% 17. Where the taxable income exceeds Rs. 2,850,000 but does not exceed Rs. 3,550,000 17.50% 18. Where the taxable income exceeds Rs. 3,550,000 but does not exceed Rs. 4,550,000 18.50% 19. Where the taxable income exceeds Rs. 4,550,000 but does not exceed Rs. 8,650,000 19.00% 20. Where the taxable income exceeds Rs. 8,650,000. 20.00% ————————————————————————————————————————---------Provided that where income of a woman taxpayer is covered by this clause, no tax shall be charged if the taxable income does not exceed Rs.125,000/-]2[: Provided further that Internally Displaced Persons Tax (IDPT), treated as income tax, on the tax payable on the taxable income of one million rupees or more, shall be levied at the rate of 5% of such tax, for tax year 2009.] 2 Colon substituted for full stop and new proviso inserted vide the Finance Act, 2009. Table [2009] 1st Sch. P. I S. No. (1) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 204 Taxable income. The Income Tax Ordinance, 2001 Rate of tax. (3) 0% 0.50% 0.75% 1.50% 2.50% 3.50% 4.50% 6.00% 7.50% 9.00% 10.00% (2) Where the taxable income does not exceed Rs.180,000 Where the taxable income exceeds Rs.180,000 but does not exceed Rs.250,000 Where the taxable income exceeds Rs.250,000 but does not exceed Rs.350,000 Where the taxable income exceeds Rs.350,000 but does not exceedRs.400,000 Where the taxable income exceeds Rs.400,000 but does not exceed Rs.450,000 Where the taxable income exceeds Rs.450,000 but does not exceed Rs.550,000 Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000 Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000 Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000 Where the taxable income exceeds Rs.900,000 but does not exceed Rs.1,050,000 Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs.1,200,000 12. Where the taxable income exceeds Rs.1,200,000 but does not exceed 11.00% Rs.1,450,000 13. Where the taxable income exceeds Rs.1,450,000 but does not exceed 12.50% Rs.1,700,000 14. Where the taxable income exceeds Rs.1,700,000 but does not exceed 14.00% Rs.1,950,000 15. Where the taxable income exceeds Rs.1,950,000 but does not exceed 15.00% Rs.2,250,000 16. Where the taxable income exceeds Rs.2,250,000 but does not exceed 16.00% Rs.2,850,000 17. Where the taxable income exceeds Rs.2,850,000 but does not exceed 17.50% Rs.3,550,000 18. Where the taxable income exceeds Rs.3,550,000 but does not exceed 18.50% Rs.4,550,000 19. Where the taxable income exceeds Rs.4,550,000 but does not exceed Rs. 19.00% 8,650,000 20. Where the taxable income exceeds Rs.8,650,000. 20.00% Provided that where income of a woman taxpayer is covered by this clause, no tax shall be charged if the taxable income does not exceed Rs.240,000: Provided further that where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the table, the income tax payable shall be the tax payable on the maximum of that slab plus an amount equal to— (i) 20% of the amount by which the total income exceeds the said limit where the total income does not exceed Rs.500,000. (ii) 30% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.1,050,000. (iii) 40% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.2,000,000. (iv) 50% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.4,450,000. (v) 60% of the amount by which the total income exceeds in each slab but the total income exceeds Rs.4,450,000.] Table substituted by the Finance Act, 2008. The old table read as follows: S. No. Taxable income. Rate of tax. (1) (2) (3) 1. Where the taxable income does not exceed Rs.150,000 0% 2. Where the taxable income exceeds Rs.150,000 but does not exceed Rs.200,000 0.25% 3. Where the taxable income exceeds Rs.200,000 but does not exceed Rs.250,000 0.50% 4. Where the taxable income exceeds Rs.250,000 but does not exceedRs.300,000 0.75% 5. Where the taxable income exceeds Rs.300,000 but does not exceed Rs.350,000 1.50% 6. Where the taxable income exceeds Rs.350,000 but does not exceed Rs.400,000 2.50% 7. Where the taxable income exceeds Rs.400,000 but does not exceed Rs.500,000 3.50% 8. Where the taxable income exceeds Rs.500,000 but does not exceed Rs.600,000 4.50% 9. Where the taxable income exceeds Rs.600,000 but does not exceed Rs.700,000 6.00% 10. Where the taxable income exceeds Rs.700,000 but does not exceed Rs.850,000 7.50% 11. Where the taxable income exceeds Rs.850,000 but does not exceed Rs.950,000 9.00% 12. Where the taxable income exceeds Rs.950,000 but does not exceed 10.00% Rs.1,050,000 13. Where the taxable income exceeds Rs.1,050,000 but does not exceed 11.00% Rs.1,200,000 14. Where the taxable income exceeds Rs.1,200,000 but does not exceed 12.50% Rs.1,500,000 15. Where the taxable income exceeds Rs.1,500,000 but does not exceed 14.00% Rs.1,700,000 1st Sch. P. I S. No. (1) 1 2 3 4 5 6 7 16. 17. 18. 19. 20. 21. The Income Tax Ordinance, 2001 205 Taxable income. Rate of tax. (3) 0% 0.75% (2) Where taxable income does not exceed Rs.300,000 Where taxable income exceeds Rs.300,000 but does not exceed Rs.350,000 Where taxable income exceeds Rs.350,000 but does not exceed Rs.400,000 Where taxable income exceeds Rs.400,000 but does not exceed Rs.450,000 Where taxable income exceeds Rs.450,000 but does not exceed Rs.550,000 Where taxable income exceeds Rs.550,000 but does not exceed Rs.650,000 Where taxable income exceeds Rs.650,000 but does not exceed Rs.750,000 Where the taxable income exceeds Rs.1,700,000 but Rs.2,000,000 Where the taxable income exceeds Rs.2,000,000 but Rs.3,150,000 Where the taxable income exceeds Rs.3,150,000 but Rs.3,700,000 Where the taxable income exceeds Rs.3,700,000 but Rs.4,450,000 Where the taxable income exceeds Rs.4,450,000 but Rs.8,400,000 Where the taxable income exceeds 20.00% Rs.8,400,000. 1.50% 2.50% 3.50% 4.50% 6.00% does not exceed 15.00% does not exceed 16.00% does not exceed 17.50% does not exceed 18.50% does not exceed 19.00% Provided that where income of a woman taxpayer is covered by this clause, no tax shall be charged if the taxable income does not exceed Rs.200,000/-] 2[2] (2) 2[ ] (3) 2 Income Tax Cir. No. 1 dated the 1st July, 2006 EXCLUSION OF AGRICULTURE INCOME FROM PERSONAL TAX RATE CARD. [First Schedule, Part I, Division I, Clause (2)] The personal tax rate card provides that where, for a tax year, an individual or AOP derives income from agriculture and the gross amount of such income for the year exceeds Rs. 80,000/-, basic exemption limit will not be available to work out the taxable income. 2 Clause (2) omitted by the Finance Act, 2006. The omitted caluse read as follows: (2) Where, for a tax year, an individual or association of persons to which subsection (1) of section 92 applies derives income from agriculture to which section 41 applies and the gross amount of such income for the year exceeds Rs. 80,000, the rates of tax imposed on the taxable income of the individual or association of persons for the year shall be as set out in the following table, namely TABLE S. No. Taxable income. Rate of tax. (1) (2) (3) 1. Where taxable income does not exceed Rs. 150,000 7.5% 2. Where taxable income exceeds Rs. 150,000 but does Rs. 11,250 plus 12.5% of the not exceed Rs. 300,000 amount exceeding Rs. 150,000 3. Where taxable income exceeds Rs. 300,000 but does Rs. 30,000 plus 20% of the not exceed Rs. 400,000 amount exceeding Rs. 300,000 4. Where taxable income exceeds Rs. 400,000 but does Rs. 50,000 plus 25% of the not exceed Rs. 700,000 amount exceeding Rs. 400,000 5. Where taxable income exceeds Rs. 700,000 Rs 125,000 plus 35% of the amount exceeding Rs. 700,000 2 Clause (3) omitted by the Finance Ordinance 2002. The omitted clause read as follows: “3. The rates of tax applicable to a legal representative of a deceased individual liable for tax under clause (b) of sub-section (1) of section 87 shall be – (a) in the tax year in which the deceased died and the following tax year, the rates applicable under clause 1; or (b) in any subsequent year, 35%. 1st Sch. P. I 8 206 The Income Tax Ordinance, 2001 Where taxable income exceeds Rs.750,000 but does not exceed Rs.900,000 Where taxable income exceeds Rs.900,000 but does not exceed Rs.1,050,000 Where taxable income exceeds Rs.1,050,000 but does not exceed Rs.1,200,000 Where taxable income exceeds Rs.1,200,000 but does not exceed Rs.1,450,000 Where taxable income exceeds Rs.1450,000 but does not exceed Rs.1,700,000 Where taxable income exceeds Rs.1,700,000 but does not exceed Rs.1,950,000 Where taxable income exceeds Rs.1,950,000 but does not exceed Rs.2,250,000 Where taxable income exceeds Rs.2,250,000 but does not exceed Rs.2,850,000 Where taxable income exceeds Rs.2,850,000 but does not exceed Rs.3,550,000 Where taxable income exceeds Rs.3,550,000 but does not exceed Rs.4,550,000 Where taxable income exceeds Rs.4,550,000 9 10 11 12 13 14 15 16 17 18 7.50% 9.00% 10.0% 11.0% 12.5% 14.0% 15.0% 16.0% 17.50% 18.50% 20.0% [1] Provided further that where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the table, the income tax payable shall be the tax payable on the maximum of that slab plus an amount equal to— (i) 20% of the amount by which the total income exceeds the said limit where the total income does not exceed Rs. 550,000. (ii) 30% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.1,050,000. (iii) 40% of the amount by which the total income exceeds in each slab but total income does not exceed Rs. 2,250,000. (iv) 50% of the amount by which the total income exceeds in each slab but total income does not exceed Rs. 4,550,000. (v) 60% of the amount by which the total income exceeds in each slab but the total income does not exceed Rs. 4,550,000: Provided further that Internally Displaced Persons Tax (IDPT), treated as income tax, on the tax payable on the taxable income of one million rupees or more, shall be levied at the rate of 5% of such tax, for tax year 2009; and (2) The rate of tax payable on bonus as IDPT as income tax shall be 30% for the tax year 2010.] 1 Proviso omitted vide the Finance Act, 2010, the omitted proviso read as follows: Provided that where income of a woman taxpayer is covered by this clause, no tax shall be charged if the taxable income does not exceed Rs.260,000: 1st Sch. P. I 207 The Income Tax Ordinance, 2001 1[Division IA Rate of Tax on certain persons The rate of tax to be paid under sub-section (1) of section 113A shall be 2[one per cent] of the turnover.] 3[Division IB Rates of Tax for Association of Persons The rate of tax imposed on the taxable income of Association of Persons for the tax year 2010 and onward shall be 25%] Â 4[Division II Rates of Tax for Companies 5[(i) (The rate of tax imposed on the taxable income of a company for the tax year 2007 and onward shall be 35%.] 1[(ii)] Inserted by the Finance Act, 2004. Substituted for “0.50%” vide the Finance Act, 2010, earlier it was substituted for “0.75%” vide the Finance Act, 2007 & EFFECTED FROM TAX YEAR 2007. 3 Division IB added vide the Finance Act, 2010. 4 Substituted by the Finance Ordinance, 2002. The original Division II read as follows: “Division II Rates of Tax for Companies The rates of tax imposed on the taxable income of a company shall be as set out in the following table, namely:– TABLE Bankin Public company, other than a Private company, other than a g banking company. banking company. compa ny. (1) (2) (3) 50% 35% 45%” 1 2 Â Income Tax Cir. No. 1 dated the 1st July, 2006 REDUCTION IN CORPORATE TAX RATES. [First Schedule, Part I, Division II] Through the Finance Act 2002, a five year rate card was introduced which contemplated a gradual reduction culminating into a uniform 35% rate for all the three categories of companies w.e.f. tax year 2007. For the tax year 2006 the rates in force are: 38% Banking 35% companies 37% Public Companies Private Companies 5 Clause (i) substituted by the Finance Act, 2007, the old clause read as follows: The Rates Of Tax Imposed On The Taxable Income Of A Company Shall Be Set Out In The Following Table, Namely:TABLE Tax Banking Public Private company Year Company company other than a banking other than company a banking company (1) (2) (3) (4) 43% 35% 47% 2003 41% 35% 44% 2004 39% 35% 41% 2005 37% 35% 38% 2006 35%] 35% 35% 2007 Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. CONTINUATION OF CORPORATE TAX RATE. [First Schedule Division II Part III] At present corporate tax rate of 35% is applicable for tax year 2007. This rate shall continue to be applicable for subsequent years also. For this purpose, an amendment has been made in Part III, Division II of the First Schedule to the Income Tax Ordinance, 2001. 1st Sch. P. I 208 The Income Tax Ordinance, 2001 2[(iii) where the taxpayer is a small company as defined in section 2, tax shall be payable at the rate of 3[25]%]4[: [5] Division III (Rate of Dividend Tax The rate of tax imposed under section 5 on 6[dividend] received from a 7[ ]company shall be – 8[10%.] 9[(a) (b)] Division IV Rate of Tax on Certain Payments to Non-residents The rate of tax imposed under section 6 on payments to non-residents shall be 15% of the gross amount of the royalty or fee for technical services. Division V Rate of Tax on Shipping or Air Transport Income of a Non-resident Person Paragraph (ii) omitted by the Finance Act, 2008. [(ii) Where the taxpayer is a society or a cooperative society, the tax shall be payable at the rates applicable to 1[a] company or an individual, whichever is beneficial to the taxpayer.] 1 1 Inserted by the Finance Act, 2003 Substituted for “the public” by the Finance Act, 2007. 2 Added by the Finance Act, 2005. 3 Substituted for “20” vide the Finance Act, 2010. 4 Colon substituted for full stop and proviso inserted by the Finance Act, 2008. 5 Proviso omitted vide the Finance Act, 2009, the omitted proviso read as follows: Provided where the turnover exceeds the prescribed limit of Rs.250 million, tax shall be payable at the following rates, namely:— ————————————————————————– Turnover Rate ————————————————————————– (i) Income attributable to turnover 25% plus exceeding Rs.250 million but does not exceed Rs.350 million (ii) Income attributable to turnover 30% plus exceeding Rs.350 million but does not exceed Rs.500 million (iii) On the income attributable to 35% plus turnover exceeding Rs.500 million.] Â Income Tax Cir. No. 1 dated the 1st July, 2006 REDUCTION IN TAX RATE FOR INTER CORPORATE DIVIDENDS [First Schedule, Part I, Division III] A concessional tax @ 5% is leviable on dividends received by a public company or an insurance company. Dividends received by other companies were subject to a withholding tax of 10% which was their final tax liability. In order to encourage more investments, withholding tax rate on inter-corporate dividends received by resident companies has been reduced to 5% like in the case of public companies w.e.f. Tax Year 2007 as a final tax liability. 6 Substituted for the word “dividends” by the Finance Ordinance, 2002. 7 Word “resident” omitted by the Finance Act, 2003 8 The figure, and full stop inserted by the Finance Act, 2007. 9 Clauses (a) and (b) omitted by the Finance Act, 2007, the omitted clauses read as follows: (a) in the case of 9[dividend] received by a public company or an insurance company 9[or any other resident company], 5% of the gross amount of the dividend; or (b) in any other case, 10% of the gross amount of the dividend. 9 Substituted for the word “dividends” by the Finance Ordinance, 2002. 9 Words inserted by the Finance Act, 2006. 1 1 1st Sch. P. I The Income Tax Ordinance, 2001 209 The rate of tax imposed under section 7 shall be – (a) in the case of shipping income, 8% of the gross amount received or receivable; or (b) in the case of air transport income, 3% of the gross amount received or receivable. 1[Division VI Income from Property (a) The rate of tax to be paid under section 15, in the case of individual and association of persons, shall be— ———————————————————————————————— S.No. Gross amount of rent Rate of tax ———————————————————————————————— (1) Where the gross amount of rent does Nil not exceed Rs.150,000. (2) Where the gross amount of rent 5 per cent of the gross Division VI substituted vide the Finance Act, 2009, the replaced division read as follows: 1[DIVISION VI INCOME FROM PROPERTY 1[(a) The rate of tax to be paid under section 15, in the case of individual and association of persons, shall be— _____________________________________________________________________ S.No. Gross amount of rent Rate of tax _____________________________________________________________________ (1) Where the gross amount of rent Nil. does not exceed Rs.150,000. (2) Where the gross amount of rent 5 per cent of the exceeds Rs.150,000 but does not gross amount exceed Rs.400,000. exceeding Rs.150,000. (3) Where the gross amount of rent Rs.12,500 plus 10 exceeds Rs.400,000 but does not per cent of the exceed Rs.1,000,000. gross amount exceeding Rs.400,000. (4) Where the gross amount of rent Rs.72,500 plus exceeds Rs.1,000,000. 15 per cent of the gross amount exceeding Rs.1,000,000. _____________________________________________________________________ (b) The rate of tax to be paid under section 15, in the case of company, shall be— _____________________________________________________________________ S.No. Gross amount of rent Rate of tax _____________________________________________________________________ (1) Where the gross amount of rent 5 per cent of the does not exceed Rs.400,000. gross amount of rent. 1 (2) (3) Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000. rent exceeding Rs.400,000. Rs.20,000 plus 10 per cent of the gross amount of Where the gross amount of rent Rs.80,000 plus 15 exceeds Rs.1,000,000. per cent of the gross amount of rent exceeding Rs.1,000,000.] 1 Division VI added by the Finance Act, 2006. 1 Paragraph (a) substituted by the Finance Act, 2008, the replaced para read as follows: (a) the rate of tax to be paid under section 15 shall be 5% of the gross amount of rent chargeable to tax under that section. Amendment in Process, under the Finance Act, 2007; (c) in Part II, division IV, after sub-clause (2), the following new clause shall be inserted, namely:— “(3) the rate of tax to be deducted under sub-section (1A) of section 153 shall be 0.5%”; 1st Sch. P. I 210 The Income Tax Ordinance, 2001 exceeds Rs.150,000 but does not exceed Rs. 400,000. amount exceeding Rs.150,000. (3) Where the gross amount of rent exceeds Rs. 400,000 but does not exceed Rs.1,000,000. Rs.12,500 plus 7.5 per cent of the gross amount exceeding Rs. 400,000. (4) Where the gross amount of rent exceeds Rs.1,000,000 Rs.57,500 plus 10 per cent of the gross amount exceeding Rs. 1,000,000. (b) The rate of tax to be paid under section 15, in the case of company, shall be— ———————————————————————————————— S.No. Gross amount of rent Rate of tax ———————————————————————————————— (1) Where the gross amount of rent does 5 per cent of the gross amount not exceed Rs.400,000. of rent. (2) Where the gross amount of rent exceeds Rs.400,000 but does not exceed Rs.1,000,000. Rs.20,000 plus 7.5 per cent of the gross amount of rent exceeding Rs.400,000. (3) Where the gross amount of rent exceeds Rs.1,000,000 Rs.1,000,000.] Rs.65,000 plus 10 per cent of the gross amount of rent exceeding 1st Sch. P. I The Income Tax Ordinance, 2001 211 1[Division VII Capital Gains on disposal of Securities The rate of tax to be paid under section 37A shall be as followsTABLE S. No. 1 1. 2. 3. Period 2 Where holding period of a security is less than six month. Where holding period of a security is more than six months but less than twelve months. Where holding period of a security is more than one year. Tax Year 3 Rate of Tax 4 2011 2012 2013 2014 2015 10% 10% 12.5% 15% 17.5% 2011 2012 2013 2014 2015 2016 7.5% 8% 8.5% 9% 9.5% 10% ---- 0% Provided that a mutual fund or a collective investment scheme shall deduct Capital Gains Tax at the rates as specified above, on redemption of securities as prescribed.] 1 Division VII inserted vide the Finance Act, 2010. 1st Sch. P. I 212 The Income Tax Ordinance, 2001 1st Sch. P. II / III 213 The Income Tax Ordinance, 2001 PART II RATES OF ADVANCE TAX (See Division II of Part V of Chapter X) The rate of advance tax to be collected by the Collector of Customs under section 148 shall be 1[5]% of the value of the goods. PART III DEDUCTION OF TAX AT SOURCE (See Division III of Part V of Chapter X) Ê 2[DIVISION-I PROFIT ON DEBT ⌦ The rate of tax to be deducted under section 151 shall be 10% of the yield or profit paid.] 1 Substituted for “4” vide the Finance Act, 2010, earlier it was substituted for “2” vide the Finance Act, 2009 and for “5” substituted vide the Finance Act, 2008, and also directed by SRO 566(I)/2008 dated the 11th June, 2008, earlier it was substituted for “6” by the Finance Act, 2007. Ê PLEASE REFER EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005 AT ANNEXURE. 2 Division I substituted by the Finance Act, 2006. The old Division I read as follows: Division I Profit on debt The rate of tax to be deducted under section 151 shall be – (a)in the case of any profit on debt referred to in clause (a) or (b) 2[or (d)] of subsection (1) of section 151,10% of the yield or profit paid; or (b)in the case of any profit on debt referred to in clause (c) of sub-section (1) of section 151, 2[20%] of the yield or profit paid. ⌦ Income Tax Cir. No. 1 dated the 1st July, 2006 REDUCTION OF WITHHOLDING RATE ON GOVERNMENT SECURITIES Profit on debt received by a person on account of a deposit/certificate under the National Savings Scheme or Post Office Savings Account, or an account/deposit maintained with a bank or a financial institution is subject to withholding tax @ 10% of the yield or profit paid. However, profit paid on other securities by the Federal Government, a provincial government or a local authority attracts WHT @ 20%, which placed the said investors at a disadvantageous position. Therefore, WHT on profit on Government Securities has been reduced from 20% to 10%. TAXATION OF PROFIT ON DEBT. [First Schedule, Part III, Division-I] Upto tax year 2006 withholding tax deducted on profit on debt @ of 10% was adjustable. Tax so deducted has now been made final discharge of tax liability under the Presumptive Tax Regime except in the cases of companies. 1st Sch. P. II / III 214 The Income Tax Ordinance, 2001 3[DIVISION-II PAYMENTS TO NON-RESIDENTS (1) The rate of tax to be deducted from a payment referred to in subsection (1A) of section 152 shall be 6% of the gross amount payable. 4[(1A) The rate of tax to be deducted from payments referred to in sub-section (1AA) of section 152, shall be 5% of the gross amount paid.] (2) The rate of tax to be deducted under sub-section (2) of section 152 shall be 5[20]% of the gross amount paid.] Division II substituted by the Finance Act, 2006. The old Division I read as follows: Division II Payments to non-residents The rate of tax to be deducted under sub-section (2) of section 152 shall be 30% of the gross amount paid. 4 Clause (1A) inserted by the Finance Act, 2008. 5 Substituted for “30” vide the Finance Act, 2010. 3 1st Sch. P. IV 221 The Income Tax Ordinance, 2001 PART IV (See Chapter XII) DEDUCTION OR COLLECTION OF ADVANCE TAX 1[DIVISION–I] 2[DIVISION–II BROKERAGE AND COMMISSION The rate of collection under sub-section (1) of section 233 shall be 10% of the amount of the payment.] 3[Division IIA Rates for Collection of Tax by a Stock Exchange Registered in Pakistan (i) in case of purchase of shares as per clause (a) of subsection (1) of section 233A. (ii) in case of sale of shares as per clause (b) of sub-section (1) of section 233A. in case of trading of shares as mentioned in clause (c) of sub-section (1) of section 233A. in case of financing of carry over trades (Badla) as per clause (d) of sub-section (1) of section 233A. (iii) (iv) 4[0.01]% of purchase value 5[0.01]% of sale value 6[0.01]% of traded value 10% of the carry over charge] Omitted by the Finance Ordinance, 2002. The omitted Division I read as follows: “Division I Transfer of Funds Rate of tax for the purpose of collection of tax under section 232 is 0.30 percent of the amount.” 2 Division II substituted by the Finance Act, 2006. The old Division II read as follows: 2[DIVISION-II BROKERAGE AND COMMISSION The rate of collection under sub-section (1) of section 233 shall be,(a) in the case of indenting commission agents, 5% of the amount of advertising agents and yarn dealers. the payment. (b) in the case of others. 10%.] 2 Substituted by the Finance Act, 2005. The substituted Division II read as follows: “A[Division II Brokerage and Commission (a) The rate of collection of tax under sub-section (1) of section 233 in respect of indenting commission agents, advertising agents and yarn dealers shall be 5% of the amount of payment. (b) The rate of collection of tax under sub-section (1) of section 233 in respect of other commission income other than (a) above, shall be 10% of the amount of payment. (a) The rate of collection of tax under sub-section (3) of section 233 shall be 10% of the amount of payment.]” A Substituted by the Finance Act, 2004. The substituted Division III read as follows: “Division II Brokerage and Commission Rate for collection of tax under section 233 is 5% of the amount of payment.” 3 Inserted by the Finance Act, 2004. 4 Substituted for “0.005” by the Finance Act, 2006. 5 Substituted for “0.005” by the Finance Act, 2006. 6 Substituted for “0.005” by the Finance Act, 2006. 1 1st Sch. P. IV The Income Tax Ordinance, 2001 222 1[Tax Division III on Motor Vehicles] Rates of collection of tax under section 234,2[(1) in case of goods transport vehicles, tax of one rupee per kilogram of the laden weight shall be charged.] 3[(1A) In the case of goods transport vehicles with laden weight of 8120 Kilograms or more, advance tax after a period of ten years from the date of first registration of vehicle in Pakistan shall be collected at the rate of twelve hundred rupees per annum.] (2) of— (a) (b) (c) 7[(3) (a) (b) (c) (d) (e) (f) In the case of passenger transport vehicles plying for hire with registered seating capacity Four or more persons but less than ten persons. Ten or more persons but less than twenty persons. Twenty persons ore more. Rs. 25 4[per seat per annum]. Rs.60 5[per seat per annum]. Rs.1006[per seat per annum]. Other private motor cars with engine capacity of— upto 1000cc 1001cc to 1199cc 1200cc to 1299cc 1300cc to 1599cc 1600cc to 1999cc 2000cc and above Substituted for “Transport business” by the Finance Act, 2008. Clause (i) substituted vide the Finance Act, 2010. The replaced clause read as follows: (1) In the case of goods transport vehicles with registered laden weight of— (a) Less than 2030 kilograms. (b) 2030 kilograms or more but less than 8120 kilograms. (c) 8120 kilograms or more but less than 15000 kilograms. (d) 15000 kilograms 2[or more] [but less than 30,000 kilograms. (e) 30,000 kilograms 2[or] more but less than 45,000 kilograms. (f) 45,000 kilograms or more but less than 60,000 kilograms. (g) 60,000 kilograms or more. 2 Inserted by the Finance Ordinance, 2002. 2 Substituted for the word “ore” by the Finance Ordinance, 2002. 3 Paragraph (1A) inserted by the Finance Act, 2003 4 Words added by the Finance Act, 2003. 5 Words added by the Finance Act, 2003. 6 Words added by the Finance Act, 2003. 7 Clause (3) substituted by the Finance Act, 2008, the replaced clause read as follows: (3) Other private motor cars with engine capacity of— (a) 1000cc to 1199 cc. (b) 1200cc to 1299cc. (c) 1300cc to 1599cc. 7[(ca) 1600 cc to 1999cc] (d) 2000cc and above. 7 Inserted by the Finance Ordinance, 2002. 750 1250 1750 3000 4000 8000] 1 2 Rs. 1,200. Rs. 7,200. Rs.12,000 Rs.18,000. Rs.24,000. Rs.30,000 Rs.36,000 Rs.500. Rs.750. Rs. 1,500 Rs.2,000 Rs.3,000. 1st Sch. P. IV 223 The Income Tax Ordinance, 2001 Division IV Electricity Consumption Rate of collection of tax under section 235 1[where the amount of electricity bill,]2[(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) does not exceed Rs. 400. exceeds Rs. 400 but does not exceed Rs. 600 exceeds Rs. 600 but does not exceed Rs. 800 exceeds Rs. 800 but does not exceed Rs. 1000 exceeds Rs. 1000 but does not exceed Rs. 1500 exceeds Rs. 1500 but does not exceed Rs. 3000 exceeds Rs. 3000 but does not exceed Rs. 4,500 exceeds Rs. 4500 but does not exceed Rs. 6000 exceeds Rs. 6000 but does not exceed Rs. 10000 exceeds Rs. 10000 but does not exceed Rs. 15000 exceeds Rs. 15000 but does not exceed Rs. 20000 exceeds Rs. 20000. Inserted by the Finance Ordinance, 2002. Substituted by the Finance Act, 2003 3 Substituted for “60” vide the Finance Act, 2010. 4 Substituted vide the Finance Act, 2010. The replaced text read as follows: 4[at the rate of 10 per cent] 4 Substituted for “Rs. 2000” by the Finance Act, 2008. 1 2 Rs. 3[0] Rs. 80 Rs. 100 Rs. 160 Rs. 300 Rs. 350 Rs, 450 Rs. 500 Rs. 650 Rs. 1000 Rs. 1500 4[At the (i) rate of 10 per cent for commercial consumers (ii) At the rate of 5 per cent for industrial consumers]] 1st Sch. P. IV The Income Tax Ordinance, 2001 224 Division V Telephone users Rates of collection of tax under section 236,-1[(a) in the case of a telephone subscriber (other than mobile phone subscriber) where the amount of monthly bill exceeds Rs.1000. 10% of the exceeding amount of bill.] 2[(b) in the case of subscriber of mobile telephone and pre-paid telephone card 10% of the amount of bill or sales price of pre-paid telephone card 3[or sale of units through 4[any electric medium] or whatever form]] 5[DIVISION-VI CASH WITHDRAWAL FROM A BANK The Rate of tax to be deducted under section 231A shall be 6[0.3]% of the cash amount withdrawn.] 7[Division VIA Advance tax on Transactions in Bank The rate of tax to be deducted under section 231AA shall be at the rate of 0.3% of the transaction.] 1 Paragraph (a) substituted by the Finance Act, 2008, the replaced para read as follows: (a) In the case of telephone subscriber 1[(other than mobile phone subscriber)] where the monthly bill— (a) exceeds Rs. 1000 but does not exceed Rs. 2000. Rs. 50 (b) exceeds Rs. 2000 but does not exceed Rs. 3000. Rs. 100 (c) exceeds Rs. 3000 but does not exceed Rs. 5000. Rs. 200 (d) exceeds Rs. 5000. Rs. 300 1 Inserted by the Finance Ordinance, 2002. 2 Substituted by the Finance Ordinance, 2002. The original clause (b) read as follows: “(b) In the case of mobile telephone subscribers if the monthly bill or the issue or sale price of prepaid telephone card.(a) does not exceed Rs. 2000. Rs. 125 (b) exceeds Rs. 2000 but does not exceed Rs. 2000. Rs. 250 (c) exceeds Rs. 5000. Rs. 400” Words inserted vide the Finance Act, 2009. Substituted for “CD” vide the Finance Act, 2010. 5 Added by the Finance Act, 2005. 6 Substituted for “0.2” by the Finance Act, 2008, earlier it was substituted for “0.1” by the Finance Act, 2006. 7 Division VIA inserted vide the Finance Act, 2010. 3 4 1st Sch. P. IV The Income Tax Ordinance, 2001 225 1[DIVISION VII PURCHASE OF MOTOR CARS AND JEEPS The rate of payment of tax under section 231B shall be as follows:– Engine Capacity upto 850cc 851cc to 1000cc 1001cc to 1300cc 1301cc to 1600cc 1601cc to 1800cc 1801cc to 2000cc Above 2000cc Amount of Tax Rs.7,500 Rs.10,500 Rs.16,875 Rs.16,875 Rs.22,500 Rs.16,875 Rs.50,000] 2[DIVISION VIII Advance tax at the time of sale by auction The rate of collection of tax under section 236A shall be 5% of the gross sale price of any property or goods sold by auction.] 3[Division IX Advance tax on Purchase of Air Ticket The rate of tax to be deducted under section 236B shall be 5% of the gross amount of air ticket.] Division substituted by the Finance Act, 2008, the replaced division read as follows: 1[Division * VIII PURCHASE OF MOTOR CARS The rate of tax to be collected under section 231 B shall be five per cent of the gross amount payable for the purchase of motor vehicle.] 1 Division VIII in absence of Division * VII seems as error in Finance Act, which may be rectify in future, inserted by the Finance Act, 2007. 2 Division VIII inserted by the Finance Act, 2009. 3 Division IX inserted vide the Finance Act, 2010. 1 1st Sch. P. IV 226 The Income Tax Ordinance, 2001 2nd Sch. P. I 227 The Income Tax Ordinance, 2001 THE SECOND SCHEDULE EXEMPTIONS AND TAX CONCESSIONS [See section 53] PART I EXEMPTIONS FROM TOTAL INCOME Incomes, or classes of income, or persons or classes of persons, enumerated below, shall be exempt from tax, subject to the conditions and to the extent specified hereunder: 1[(1)] 2[(2)] (3) Any income chargeable under the head "Salary" received by a person who, not being a citizen of Pakistan, is engaged as an expert or technical, professional, scientific advisor or consultant or senior management staff by institutions of the Agha Khan Development Network, (Pakistan) listed in Schedule I of the Accord and Protocol dated, November 13, 1994 executed between the Government of the Islamic Republic of Pakistan and Agha Khan Development Network. [(4) Any income chargeable under the head “salary” received by – (a) a Pakistani seafarer, working on Pakistani flag vessels for one hundred and eighty three days or more during a tax year; or (b) a Pakistani seafarer working on a foreign vessel provided that such income is remitted to Pakistan, not later than two months of the relevant income year, through normal banking channels.] (5) Any allowance or perquisite paid or allowed as such outside Pakistan by the Government to a citizen of Pakistan for rendering service outside Pakistan. 4[(6)] 5[(7)] (8) Any pension received by a citizen of Pakistan from a former employer, other than where the person 1 Clause (1) omitted by the Finance Act, 2003, read as follows: “(1) Any income chargeable under the head "Salary" received by any person being an employee of the International Irrigation Management Institute (IIMI) in Pakistan, who is neither a citizen of Pakistan nor a resident individual in any of the four years immediately preceding the year in which he arrived in Pakistan.” 2 Clause (2) omitted by the Finance Act, 2008, the omitted clause read as follows: Any income chargeable under the head "Salary" received by, or due to, any person, not being a citizen of Pakistan or a resident individual, as remuneration for services rendered by him as a health professional under the contract of service concluded with Shaukat Khanum Memorial Hospital and Research Center, Lahore, and approved by the Federal Government for the purposes of this clause. Substituted vide SRO 1119(I)/2006 dated the 1st November, 2006, the old sub clause read as follows: Any income chargeable under head “Salary” received by a Pakistani seafarer working on a foreign vessel 3[or on Pakistan flag vessels for 183 days or more during a tax year] provided that such income is remitted to Pakistan, not later than two months of the relevant income year, through normal banking channels. 4 Clause (6) omitted by the Finance Act, 2008, the omitted clause read as follows: Any income chargeable under the head “Salary” received by a person, not being a citizen of Pakistan, by virtue of his employment with the British Council. 5 Omitted by the Finance Ordinance, 2002. The omitted clause (7) read as follows: “(7) Any income chargeable under the head "Salary" paid by Government to Khasadars, levies and Badraggas employed in the tribal territory on the North West Frontier and of all persons employed in the tribal levy services in Baluchistan.” 2nd Sch. P. I 228 The Income Tax Ordinance, 2001 continues to work for the employer (or an associate of the employer). Provided that where the person receives more than one such pension, the exemption applies only to the higher of the pensions received. 1[(9) Any pension— (i) received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government; (ii) granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service.] (10) [2] (11) [3] (12) Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Federal Board of Revenue for the purpose of this clause. (13) Any income representing any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs as does not exceed – (i) in the case of an employee of the Government, a local authority, a statutory body or corporation established by any law for the time being in force, the amount receivable in accordance with the rules and conditions of the employee’s services; (ii) any amount receivable from any gratuity fund approved by the Commissioner in accordance with the rules in Part III of the Sixth Schedule; (iii) in the case of any other employee, the amount not exceeding two hundred thousand rupees receivable under any scheme applicable to all employees of the employer and approved by the Federal Board of Revenue for the purposes of this sub-clause; and (iv) in the case of any employee to whom sub-clause (i), (ii) and (iii) do not apply, fifty per cent of the amount receivable or seventy-five thousand rupees, whichever is the less: Provided that nothing in this sub-clause shall apply – (a) to any payment which is not received in Pakistan; (b) to any payment received from a company by a director of such company who is not a regular employee of such company; 1 Clause (9) substituted by the Finance Act, 2006. The old clause (9) read as follows: (9) Any pension received in respect of any service rendered by a member of the Armed Forces of Pakistan or as an employee of the Federal Government or a Provincial Government.. 2 Clause (10) omitted by the Finance Act, 2006, the omitted clause read as follows: (10) Any pension granted to any public servant to whom clause (14) does not apply in respect of injuries received in the performance of his duties. 3 Clause (11) omitted by the Finance Act, 2006, the omitted clause read as follows: (11) Any pension granted to any public servant to whom clause (15) does not apply who has been invalidated from service on account of any bodily disability. 2nd Sch. P. I 229 The Income Tax Ordinance, 2001 (c) to any payment received by an employee who is not a resident individual; and to any gratuity received by an employee who has already received any gratuity from the same or any other employer. (14) [1] (15) [2] (16) Any income derived by the families and dependents of the "Shaheeds" belonging to Pakistan Armed Forces from the special family pension, dependents pension or children's allowance granted under the provisions of the Joint Services Instruction No. 5/66. (17) Any income derived by the families and dependents of the "Shaheeds" belonging to the Civil Armed Forces of Pakistan to whom the provisions of the Joint Services Instruction No. 5/66 would have applied had they belonged to the Pakistan Armed Forces from any like payment made to them. (18) [3] (19) Any sum representing encashment of leave preparatory to retirement of a member of the Armed Forces of Pakistan or an employee of the Federal Government or a Provincial Government. (20) Any income received by a person from an annuity issued under the Pakistan Postal Annuity Certificate Scheme on or after the 27th July, 1977, not exceeding ten thousand rupees per annum. 4[(21)] (22) Any payment from a provident fund to which the Provident Funds Act, 1925(XIX of 1925) applies. (23) The accumulated balance due and becoming payable to an employee participating in a recognized provident fund. 5[(23A) the accumulated balance upto 1[50]% received from the voluntary pension system offered by a pension fund manager under the Voluntary Pension System Rules, 2005 at the time of eligible person’s— 1 Clause (14) omitted by the Finance Act, 2006, the omitted clause read as follows: (14) Any pension granted to the personnel of Armed Forces of Pakistan (including personnel of the Territorial Force and the National Service of Pakistan) in respect of injuries received in the performance of their duties as such. 2 Clause (15) omitted by the Finance Act, 2006, the omitted clause read as follows: (15) Any pension granted to the personnel of the Armed Forces of Pakistan (including personnel of the Territorial Force and the National Service of Pakistan) invalidated from service with such Forces on account of bodily disability attributable to, or aggravated by, such service. 3 Clause (18) omitted by the Finance Act, 2006, the omitted clause read as follows: (18) Any pensions granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service. 4 Clause (21) omitted by the Finance Act, 2008, the omitted clause read as follows: Any income received by a person from an annuity or annuities issued by the State Life Insurance Corporation of Pakistan or a life insurance company registered under section 3 of the Insurance Ordinance, 2000 (XXXIX of 2000): Provided that this clause shall not apply to so much of the income received by a person from an annuity or annuities which, together with the income from any annuity or annuities referred to in clause (20), exceeds ten thousand rupees per annum. 5 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009WITHDRAWALS OF ACCUMULATED BALANCE FROM VOLUNTARY PENSION SCHEMES [Clause (23A) of Part I of the Second Schedule] Previously, out of accumulated balance, upto 25% received from the Voluntary Pension Scheme (VPS) was exempt from tax. The limit has been enhanced to 50%. This amendment will encourage investments in VPS. 2nd Sch. P. I 230 The Income Tax Ordinance, 2001 (a) retirement; or (b) disability rendering him unable to work; or (c) death by his nominated survivors.] (24) Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969. (25) Any payment from an approved superannuation fund made on the death of a beneficiary or in lieu of or in commutation of any annuity, or by way of refund of contribution on the death of a beneficiary2[.] (26) Any income of a person representing the sums received by him as a worker from out of the Workers Participation Fund established under the Companies Profits (Workers Participation) Act, 1968 (XII of 1968). 3[(27)] 4[(28)] 5[(29)] 6[(30)] 1[(31)] Clause (23A) added by the Finance Act, 2006. 1 Substituted for “25” vide the Finance Act, 2009. 2 Full stop added and sub-clauses (i) to (iv) omitted by the Finance Act, 2008, the omitted sub-clauses read as follows: (i) in the case of an employee of the Government or a local authority or a statutory body or corporation established by any law for the time being in force, the amount receivable in accordance with the rules and conditions of his service; (ii) any amount receivable from any gratuity fund approved by the Commissioner in accordance with the rules contained in Part III of the Sixth Schedule; (iii) in the case of any other employee, the amount not exceeding two hundred thousand rupees receivable under any scheme applicable to all employees of the employer and approved by the Central Board of Revenue for the purposes of this subclause; and (iv) in the case of any employee to whom sub-clauses (i), (ii) and (iii) do not apply, fifty per cent of the amount receivable or seventy-five thousand rupees, whichever is the less: Provided that nothing in this sub-clause shall apply _ (a) to any payment which is not received in Pakistan ; (b) to any payment received from a company by a director of such company who is not regular employee of such company; (c) to any payment received by an employee who is not a resident of Pakistan ; and (d) to any gratuity received by an employee who has already received any gratuity from the same or any other employer. 3 Omitted by the Finance Ordinance, 2002. The omitted clause (27) read as follows: ” (27) Any income of an officer representing the sum received by him as Entertainment Allowance admissible to him under the Ministry of Finance and Provincial Coordination (Finance Division) Office Memorandum No. F.2(2)-Imp-1/77, dated the 29th April, 1977.” 4 Omitted by the Finance Ordinance, 2002. The omitted clause (28) read as follows: “(28) Any income of an officer representing the sum received by him as Entertainment Allowance admissible to him under the Ministry of Finance (Finance Division) Office Memorandum No. F.1 (1)-Imp/83, dated the 18th August, 1983.” 5 Omitted by the Finance Ordinance, 2002. The omitted clause (29) read as follows: “(29) Any income of an officer of the Pakistan Armed Forces representing the sum received as Entertainment Allowance admissible to him under the Ministry of Defence Office Memorandum No. 716(D)/(B)/77, dated the 29th April, 1977.” 6 Omitted by the Finance Ordinance, 2002. The omitted clause (30) read as follows: “(30) Any income of an officer representing the sum received by him as Entertainment Allowance admissible to him under the Cabinet Secretariat (Establishment Division) Office Memorandum No. 18/2/78-CV, dated the 13th July, 1978.” 2nd Sch. P. I 231 The Income Tax Ordinance, 2001 2[(32)] 3[(33)] 4[(34)] (35) Any income representing compensatory allowance payable to a citizen of Pakistan locally recruited in Pakistan Mission abroad as does not exceed 75 per cent of his gross salary. 5[(36)] 6[(37)] 7[(38)] (39) Any special allowance or benefit (not being entertainment or conveyance allowance) or other perquisite within the meaning of section 12 specially granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit. (40) Any income of a newspaper employee representing Local Travelling Allowance paid in accordance with the decision of the Third Wage Board for Newspaper Employees constituted under the Newspaper Employees (Conditions of Service) Act, 1973, published in Part II of the Gazette of Pakistan, Extraordinary, dated the 28th June, 1980. 8[(41)] 9[(42) Omitted by the Finance Ordinance, 2002. The omitted clause (31) read as follows: “(31) Any income of an officer representing the sum received by him as Senior Post Allowance admissible to him under the Ministry of Finance, Planning and Development (Finance Division) Office Memorandum No. F.1(36) Gaz-IMP-I/73, dated the 18th August, 1973.” 2 Omitted by the Finance Ordinance, 2002. The omitted clause (32) read as follows: “(32) Any income of an officer representing the sum received by him as Senior Post Allowance admissible to him under the Ministry of Finance and Provincial Coordination (Finance Division) Office Memorandum No. F.1(1) Imp-I/77, dated the 28th April, 1977.” 3 Omitted by the Finance Act, 2003. The omitted clause (33) read as follows: “(33) Any income of any officer representing the sum received by him as Orderly Allowance admissible to hi under the Finance Division O.M. No. F.1(3)-IMP-II/85, dated the 24th October, 1985.” 4 Omitted by the Finance Act, 2003. The omitted clause (33) read as follows: “(34) Any income of an employee of a recognized University in Pakistan representing the sums received by him as [4] Orderly Allowance admissible under the terms and conditions of his service.” 5 Omitted by the Finance Act, 2003. The omitted clause (33) read as follows: “(36) Any income of an officer representing the sum received by him as Personal Staff Subsidy admissible to him under the Cabinet Secretariat (Establishment Division) Office Memorandum No. 18/2/78-CV, dated the 13th July, 1978.” 6 Omitted by the Finance Ordinance, 2002. The omitted clause (37) read as follows: “(37) Any income representing cost of living allowance admissible to the Government employees at the rate of 7%.” 7 Clause (38) omitted by the Finance Act, 2006, the omitted clause read as follows: (38) Any sum paid, for purpose of meeting the charges for gas, water and electricity, or the value of gas, water and electricity provided free of charge to an employee up to ten per cent of the minimum of time scale, and where there is no time scale, up to ten per cent of the basic salary. 8 Omitted by the Finance Act, 2003. The omitted clause read as follows: “(41) Such portion of the income of a member of Pakistan Armed Forces as is compulsorily payable by him under any orders issued by Government to mess, entertainment or band fund.” 9 Clauses (42) to (49) omitted by the Finance Act 2006. The old clauses read as follows: (42) Any amount received as flying allowance by pilots, flight engineers and navigators employed by any Pakistani airline or by Civil Aviation Authority. 1 2nd Sch. P. I 232 The Income Tax Ordinance, 2001 (43) (44) (45) (46) (47) (48) (49)] 1[(50)] (51) The perquisite represented by the right of the President of Pakistan, the Provincial Governors and the Chiefs of Staff, Pakistan Armed Forces to occupy free of rent as a place of residence any premises provided by the Government. (52) The perquisite represented by free conveyance provided and the sumptuary (entertainment) allowance granted by Government to Provincial Governors, the Chiefs of Staff, Pakistan Armed Forces and the Corps Commanders. (53) The following perquisites and allowances provided or granted by Government to the Ministers of the Federal Government, namely :(a) rent-free accommodation in so far as the value thereof exceeds ten per cent of the basic salary of the Ministers concerned; (b) house-rent allowance paid by Government in lieu of rent-free accommodation in so far as it exceeds five hundred and fifty rupees per month; (c) free conveyance; and (d) sumptuary allowance. 2[(53A) ÊThe following perquisites received by an employee by virtue of his employment, namely:- (43) Any amount notified as flying allowance payable to pilots, flight engineers and navigators of the Pakistan Air Force. (44) Any amount notified as flying allowance payable to pilots, flight engineers and navigators of the Pakistan Army and the Pakistan Navy. (45) Any amount received as flying allowance by junior commissioned officers or other ranks of Pakistan Armed Forces. (46) Any amount notified as submarine allowance payable to officers of the Pakistan Navy. (47) The value of rations issued in kind, or cash allowance paid in lieu thereof, to members of Pakistan Armed Forces or of Territorial Forces. (48) The value of rent-free quarters occupied by, or cash allowance paid in lieu thereof, to members of the Pakistan Armed Forces, including Territorial Force. (49) The conservancy allowance granted in lieu of free conservancy to personnel below commissioned rank of Pakistan Armed Forces and Territorial Force. 1 Omitted by the Finance Act, 2003. The omitted clause read as follows: “(50) Deferred pay admissible to Armed Forces personnel under the new Pay Code.” 2 Inserted by the Finance Act, 2005. EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. Ê 2nd Sch. P. I 233 The Income Tax Ordinance, 2001 (i) free or concessional passage provided by transporters including airlines to its employees (including the members of their household and dependents); (ii) free or subsidized food provided by hotels and restaurants to its employees during duty hours; (iii) free or subsidized education provided by an educational institution to the children of its employees; (iv) free or subsidized medical treatment provided by a hospital or a clinic to its employees; and (v) any other perquisite or benefit for which the employer does not have to bear any marginal cost, as notified by the Federal Board of Revenue.] 1[(54)] (55) The perquisites represented by the right of a judge of the Supreme Court of Pakistan or of a judge of High Court to occupy free of rent as a place of residence any premises provided by Federal or Provincial Government, as the case may be, or in case a judge chooses to reside in a house not provided by Government, so much of income which represents the sum paid to him as house rent allowance. (56) The following perquisites, benefits and allowances received by a Judge of Supreme Court of Pakistan and Judge of High Court, shall be exempt from tax. (1) (a) expenses. (b) High (c) Perquisites and benefits derived 2[from] use of official car maintained at Government Superior judicial allowance payable to a Judge of supreme Court of Pakistan and Judge of a Court. Transfer allowance payable to a Judge of High Court. (2) The following perquisites of the Judge of Supreme Court of Pakistan and Judge of High Court shall also be exempt from tax during service, and on or after retirement. (a) The services of a driver and an orderly. (b) 1000 (one thousand) free local telephone calls per month. (c) 1000 units of electricity as well as (25 hm3 of gas) per month and free supply of water; and EXEMPTION ON PERQUISITES CARRYING ZERO MARGINAL COST TO THE EMPLOYERS Certain Organizations provide benefits to its employees for which they do not have to bear any marginal costs. For example: (i) free or concessional passage provided by transporters including airlines to its employees (including the members of their household and dependents); (ii) free or subsidized food provided by hotels and restaurants to its employees during duty hours; (iii) free or subsidized education provided by an educational institution to the children of its employees; (iv) free or subsidized medical treatment provided by a hospital or a clinic to its employees; These benefits were taxable in the hands of the employees as perquisites. With the insertion of clause (53A) in Part I of the Second Schedule, value of these perquisites has been exempted in the hands of the employees along with any other perquisites notified by the Central Board of Revenue. The exemption would be available for tax year 2006 onwards. For withholding tax purpose, the change shall be effective from July 1, 2005. 1 Omitted by the Finance Ordinance, 2002. The omitted clause (54) read as follows: “(54) Any sum paid, for purpose of meeting the charges for gas, water and electricity, or the value of gas, water and electricity provided free of charge to the Federal and Provincial Ministers.” 2 The word “form” substituted by the Finance Act, 2005. 2nd Sch. P. I (d) 234 The Income Tax Ordinance, 2001 200 litres of petrol per month. (3) If during service, a judge dies, exemption from tax in respect of benefits and perquisites provided to widow as mentioned in sub-clause (2) shall also be available to the widow. (57) (1) Any income from voluntary contributions, house property and investments in securities of the Federal Government derived by the following, namely: (i) National Investment (Unit) Trust of Pakistan established by the National Investment Trust Limited, if not less than ninety per cent of its Units at the end of that year are held by the public and not less than ninety per cent of its income of the year is distributed among the Unit-holders; (ii) any Mutual Fund approved by the 1[Securities and Exchange Commission of Pakistan] and set up by the Investment Corporation of Pakistan, if not less than ninety per cent of its Certificates at the end of that year are held by the public and not less than ninety per cent of its income of that year is distributed among the Certificate-holders; and (iii) Sheikh Sultan Trust, Karachi. (2) Any income 2[(other than capital gain on stock and shares of public company, PTC vouchers, modarba certificates, or any instrument of redeemable capital and derivative products held for less than 12 months)] derived by any Mutual Fund, investment company, or a collective investment scheme, 3[or a 4[REIT Scheme]]5[or Private Equity and Venture Capital Fund] [6] or the National Investment (Unit) Trust of Pakistan established by the National Investment Trust Limited from any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), if not less than ninety per cent of its income of that year is distributed amongst the Unit-holders. (3) Any income of the following funds and institutions, namely: (i) a provident fund to which the Provident Funds Act, 1925 (XIX of 1925), applies; (ii) trustees on behalf of a recognized provident fund or an approved superannuation fund or an approved gratuity fund; (iii) a benevolent fund or group insurance scheme approved by the Federal Board of Revenue for the purposes of this clause; (iv) Service Fund; (v) Employees Old Age Benefits Institution established under the Employees Old Age Benefit Act, 1976 (XIV of 1976); (vi) any Unit, Station or Regimental Institute; and Substituted for the words “Controller of Capital Issues” by the Finance Ordinance, 2002. Words inserted vide the Finance Act, 2010 3 Words inserted by the Finance Act, 2006. 4 Substituted for “real estate investment trust” by the Finance Act, 2008. 5 Words inserted by the Finance Act, 2007. 6 Words “approved by the Securities and Exchange Commission” by the Finance Act, 2008, The Commissioner of Income Tax has authorized by CBR to grant approval under this clause. (Issued vide SRO 212(I)/2005 dated the 3rd March, 2005.) 1 2 2nd Sch. P. I 235 The Income Tax Ordinance, 2001 (vii) any recognized Regimental Thrift and Savings Fund, the assets of which consist solely of deposits made by members and profits earned by investment thereof; 1[(viii) a Pension Fund approved by the Securities and Exchange Commission of Pakistan under the Voluntary Pension System Rules, 2005;] 2[(ix) any profit or gain or benefit derived by a pension fund manager from a pension Fund approved under the Voluntary Pension System Rules, 2005, on redemption of the seed capital invested in pension fund as specified in the Voluntary Pension System Rules, 2005] 3[: 4[(x)] (xi) International Irrigation Management Institute.] 5[(xii) Punjab Pension Fund established under the Punjab Pension Fund Act, 2007 (I of 2007) and the trust established thereunder] ( (58) (1) Any income of a trust or welfare institution [or non-profit organization] specified in subclauses (2) and (3) from donations, voluntary contributions, subscriptions, house property, investments in the securities of the Federal Government and so much of the income chargeable under the head "Income from business " as is expended in Pakistan for the purposes of carrying out welfare activities: Provided that in the case of income under the head "Income from business", the exemption in respect of income under the said head shall not exceed an amount which bears to the income under the said head the same proportion as the said amount bears to the aggregate of the incomes from the aforesaid sources of income. (2) A trust administered under a scheme approved by the Federal Government in this behalf and established in Pakistan exclusively for the purposes of carrying out such activities as are for the benefit and welfare of - Added by the Finance Act, 2005. Added by the Finance Act, 2005. 3 Semicolon substituted for full stop and sub-clause (x) inserted by the Finance Act, 2006. 4 Paragraph (x) omitted by the Finance Act, 2008, the omitted para read as follows: the accumulated balance upto 25% received from the voluntary pension system offered by a pension fund manager under the Voluntary Pension System Rules, 2005 at the time of eligible person’s: (a) retirement; or (b) disability rendering him unable to work; or (c) death by his nominated survivors.] Explanation. - For the purpose of this clause, "Service Fund" means a fund which is established under the authority, or with the approval of the Federal Government for the purpose of (a) securing deferred annuities to the subscribers of payment to them in the event of their leaving the service in which they are employed; or (b) making provision for their wives or children after their death; or (c) making payment to their estate or their nominees upon their deathT[; and 1 2 T Semicolon substituted for full stop and sub-clause (xi) added vide SRO 1038(I)/2006 dated the 9th October, 2006. Inserted vide the Finance Act, 2010 Â Income Tax Cir. No. 1 dated the 1st July, 2006 AMENDMENT IN RULES - REGARDING APPROVAL OF NON-PROFIT ORGANIZATIONS (NPOS) AND WELFARE INSTITUTIONS. Filing of Return by NPOs and Welfare Institutions The NPOs mostly do not file the return of income tax and even do not obtain NTN considering themselves as exempt entities. Now, it has been made explicitly mandatory for NPOs to file income tax returns annually. 6 Inserted by the Finance Ordinance, 2002. 5 2nd Sch. P. I 236 The Income Tax Ordinance, 2001 (i) ex-servicemen and serving personnel, including civilian employees of the Armed Forces, and their dependents; or (ii) ex-employees and serving personnel of the Federal Government or a Provincial Government and their dependents, where the said trust is administered by a committee nominated by the Federal Government or, as the case may be, a Provincial Government. (3) (A trust or welfare institution [or non-profit organization] approved by of Income Tax] for the purposes of this sub-clause. [Regional Commissioner (59) Any income which is derived from investments in securities of the Federal Government, [profit on debt from [scheduled banks], grant received from Federal Government or Provincial Government or District Governments, foreign grants] and house property held under trust or other legal obligations wholly, or in part only, for religious or charitable purposes and is actually applied or finally set apart for application thereto: Provided that nothing in this clause shall apply to so much of the income as is not expended within Pakistan: Provided further that if any sum out of the amount so set apart is expended outside Pakistan, it shall be included in the total income of the tax year in which it is so expended or of the year in which it was set apart, whichever is the greater, and the provisions of section 122 shall not apply to any assessment made or to be made in pursuance of this proviso. Explanation. - Notwithstanding anything contained in the Mussalman Wakf Validating Act, 1913 (VI of 1913), or any other law for the time being in force or in the instrument relating to the trust or the institution, if any amount is set apart, expended or disbursed for the maintenance and support wholly or partially of the family, children or descendents of the author of the trust or the donor or, the maker of the institution or for his own maintenance and support during his life time or payment to himself or his family, children, relations or descendents or for the payment of his or their debts out of the income from house property dedicated, or if any expenditure is made other than for charitable purposes, in each case such expenditure, provision, setting apart, payment or disbursement shall not be deemed, for the purposes of this clause, to be for religious or charitable purposes. (60) Any income of a religious or charitable institution derived from voluntary contributions applicable solely to religious or charitable purposes of the institution: Provided that nothing contained in clause (61) or this clause shall apply to the income of a private religious trust which does not ensure for the benefit of the public. Ê (61) 1[Any] amount paid as donation to the following institution, foundations, societies, boards, A list of approved trust or welfare institution or non-profit organization is available at Annexure “A” Inserted by the Finance Ordinance, 2002. 3 Substituted for “the Central Board of Revenue” by the Finance Act, 2006. 4 Inserted by the Finance Ordinance, 2002. 5 Substituted for “financial institutions” by the Finance Act, 2003 Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. RELIEF FOR AMOUNTS PAID AS DONATIONS. Under clause (61) of Part I of Second Schedule, donations paid to certain specified welfare institutions are exempt from income tax. However, these donations are subject to monetary limits prescribed in section 61, and further more, only tax credit can be claimed which was not the intent of law. This clause has been suitably amended to make the amounts donated to specified welfare institutions allowable as a straight deduction subject to following monetary limits:» 2 2nd Sch. P. I 237 The Income Tax Ordinance, 2001 trusts and funds, namely:_ (i) any Sports Board or institution recognised by the Federal Government for the purposes of promoting, controlling or regulating any sport or game; 2[(ii)] (iii) Fund for Promotion of Science and Technology in Pakistan; (iv) Fund for Retarded and Handicapped Children; (v) National Trust Fund for the Disabled; 3[(vi)] (vii) Fund for Development of Mazaar of Hazarat Burri Imam; (viii) Rabita-e-Islami's Project for printing copies of the Holy Quran; (ix) Fatimid Foundation, Karachi; (x) Al-Shifa Trust; (xi) Bank of Commerce and Credit International Foundation for Advancement of Science and Technology; (xii) Society for the Promotion of Engineering Sciences and Technology in Pakistan; 4[(xiii)] 5[(xiv)] 6[(xv)] 7[(xvi)] 1[(xvii)] (i) in the case of an individual or AOP, thirty per cent of the taxable income of the person for the year; and (ii) in the case of a company, fifteen per cent of the taxable income of the person for the year. The provision of amended law will be applicable to those donations which are paid on or after July 1, 2005. 1 The words, figure and comma “Subject to the provisions of section 61, any” substituted by the Finance Act, 2005. 2 Omitted by the Finance Act, 2005. The omitted sub-clause (ii) read as follows: “(ii) President's Fund for Afghan Refugees;” 3 Omitted by the Finance Act, 2005. The omitted sub-clause (vi) read as follows: “(vi) Bangladesh Flood Relief Fund, 1988;” 4 Omitted by the Finance Act, 2005. The omitted sub-clause (xiii) read as follows: “(xiii) President's Fund for Assistance to Palestine;” 5 Omitted by the Finance Act, 2005. The omitted sub-clause (xiv) read as follows: “(xiv) President's Famine Relief Fund for Africa;” 6 Omitted by the Finance Act, 2005. The omitted sub-clause (xv) read as follows: “(xv) Bangladesh Cyclone Relief Fund, 1985;” 7 Omitted by the Finance Act, 2005. The omitted sub-clause (xvi) read as follows: “(xvi) Prime Minister's Fund for the Welfare of Widows and Orphans;” 2nd Sch. P. I 238 The Income Tax Ordinance, 2001 2[(xviii)] 3[(xix)] 4[(xx)] 5[(xxi) (xxii)] (xxiii) Karachi; Citizens-Police Liaison Committee, Federal Reporting Cell, Sindh Governor House, (xxiv) ICIC Foundation; (xxv) BCCI Foundation; (xxvi) National Management Foundation; (xxvii) Endowment Fund of the institutions of the Agha Khan Development Network (Pakistan listed in Schedule 1 of the Accord and Protocol, dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and Agha Khan Development Network; (xxviii) Shaheed Zulfiqar Ali Bhutto Memorial Awards Society; (xxix) Iqbal Memorial Fund; (xxx) Cancer Research Foundation of Pakistan, Lahore; (xxxi) Shaukat Khanum Memorial Trust, Lahore; (xxxii) Christian Memorial Hospital, Sialkot; (xxxiii) National Museums, National Libraries and Monuments or institutions declared to be National Heritage by the Federal Government; (xxxiv) Mumtaz Bakhtawar Memorial Trust Hospital, Lahore; 1 Omitted by the Finance Act, 2005. The omitted sub-clause (xvii) read as follows: “(xvii) Prime Minister's Disaster Relief Fund, 1987;” 2 Omitted by the Finance Act, 2005. The omitted sub-clause (xviii) read as follows: “(xviii) Chief Minister Punjab's Flood Relief Fund, 1988;” 3 Omitted by the Finance Act, 2005. The omitted sub-clause (xix) read as follows: “(xix) Prime Minister's Fund for Welfare and Relief for Kashmiris;” 4 Omitted by the Finance Act, 2005. The omitted sub-clause (xx) read as follows: “(xx) Prime Minister's Bangladesh Cyclone Relief Fund, 1991;” 5 Sub-clauses (xxi) & (xxii) omitted by the Finance Act, 2006, the omitted subclauses read as follows: (xxi) Sindh Governor's Relief Fund, 1990, for the Relief and Rehabilitation of Victims of Violence in Sindh; (xxii) Balochistan Governor’s Relief Fund for the relief and rehabilitation of drought affected people of Balochistan;. 2nd Sch. P. I 239 The Income Tax Ordinance, 2001 (xxxv) Kashmir Fund for Rehabilitation of Kashmir Refugees and Freedom Fighters; (xxxvi) Institutions of the Agha Khan Development Network (Pakistan) listed in Schedule 1 of the Accord and Protocol, dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and Agha Khan Development Network; (xxxvii) Azad Kashmir President's Mujahid Fund, 1972 ; National Institute of Cardiovascular Diseases, (Pakistan) Karachi; Businessmen Hospital Trust, Lahore; Premier Trust Hospital, Mardan ; Faisal Shaheed Memorial Hospital Trust, Gujranwala; Khair-un-Nisa Hospital Foundation, Lahore; Sind and Balochistan Advocates' Benevolent Fund; Rashid Minhas Memorial Hospital Fund; (xxxviii) Any relief 1[or] welfare fund established by the Federal Government; (xxxix) Mohatta Palace Gallery Trust; J[ ] ([2xl]) Bagh-e-Quaid-e-Azam project, Karachi [; and (xli) Any amount donated for Tameer-e-Karachi Fund [:]] 5[Provided that the amount so donated shall not exceed- (a) in the case of an individual or association of persons, thirty percent of the taxable income of the person for the year; and (b) in the case of a company, 6[twenty] percent of the taxable income of the person for the year.] 7[(62)] 8[(63)] 9[(63A)] The word “are” substituted by the Finance Act, 2005. The word “and” omitted by SRO 701(I)/2004 dated the 16th August, 2004. 2 Substituted for “xxxxx” by SRO 701(I)/2004 dated the 16th August, 2004. 3 Semi colon and word “;and” substituted for full stop and new sub-clause (xli) inserted by SRO 701(I)/2004 dated the 16th August, 2004 4 The full stop substituted by the Finance Act, 2005. 5 Added by the Finance Act, 2005. 6 Substituted for “fifteen” vide the Finance Act, 2009. 7 Clause (62) omitted by the Finance Act, 2008, the omitted clause read as follows: Such portion of the total income of a taxpayer as is paid by him during the income year as donation to the Liaquat National Hospital Association, Karachi: Provided that the amount so donated shall be included in computing the total income of the taxpayer: Provided further that the amount by which the taxable by a taxpayer is reduced on account of the exemption under this clause shall be equal to the sum which bears the same proportion to the sum exempted from tax under this clause as the tax payable on the total income of the taxpayer bears to the said total income. 8 Omitted by the Finance Ordinance, 2002. Proposed to omit by the Finance Act, 2006. The omitted clause (63) read as follows: “(63) Any amount paid as donation to the Prime Minister's Fund for National Debt Retirement: Provided that the exemption under this clause shall not apply in respect of any assessment year commencing on, or after, the first day of July,2002. “ 9 Clause (63A) omitted by the Finance Act, 2008, earlier it was inserted vide SRO 1033(I)/2005 dated the 10 th October, 2005, that clause read as follows: Any amount paid as donation to the President’s Relief Fund for Earthquake Victims 2005. 1 J 2nd Sch. P. I 240 The Income Tax Ordinance, 2001 [(63B)] 1(64) 2[(64A) Any amount donated to the Prime Minister’s Special Fund for victims of terrorism.] 3[(64B) Any amount donated to the Chief Minister’s (Punjab) Relief Fund for Internally Displaced Persons Persons (IDPs) of NWFP.] (65) Any income derived from donations made by non-official or private sector sources in Pakistan to the Waqf for Research on Islamic History, Art and Culture, Istanbul set up by the Research Centre for Islamic History, Art and Culture (IRCICA). 4[(66) i. Any income derived by— Abdul Sattar Edhi Foundation, Karachi. ii. Al-Shifa Trust, Rawalpindi. iii. Bilquis Edhi Foundation, Karachi. iv. Fatimid Foundation, Karachi. v. Hamdard Laboratories (Waqf) Pakistan. vi. International Islamic Trade Finance Corporation. vii. Islamic Corporation for Development of Private Sector. viii. National Memorial Bab-e-Pakistan Trust for the assessment year commencing on or after the 1st day of July, 1994. ix. Pakistan Agricultural Research Council, Islamabad. x. Pakistan Engineering Council. xi. The corporatized entities of Pakistan Water and Power Development Authority from the date of their creation upto the date of completion of the process of corporatization i.e. till the tariff is notified. Clause (63B) omitted by the Finance Act, 2008, it was earlier added vide SRO 1088 dated the 31st October, 2006, that clause read as follows: Any amount donated or paid, as sponsorship in connection with the holding of 2nd session of the World Islamic Economic Forum, 2006. 1 Omitted by the Finance Ordinance, 2002. The omitted clause (64) read as follows: “(64) Any amount paid as donation to the National Self Reliance Fund: Provided that the exemption under this clause shall not apply in respect of any assessment year commencing on, or after, the first day of July,2002.” 2 Clause (64A) inserted vide SRO 389(I)/2009 dated the 19th May, 2009. 3 Clause (64B) inserted vide SRO 576(I)/2009 dated the 18th June, 2009 4 Clause (66) substituted by the Finance Act, 2006. The old clause (66) read as follows: (66) Any income of the Institutions of the Agha Khan Development Network (Pakistan) as contained in Schedule 1 of the Accord and Protocol, dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and the Agha Khan Development Network. 2nd Sch. P. I 241 The Income Tax Ordinance, 2001 xii. The Institution of Engineers, Pakistan, Lahore. 1[xiia The Prime Minister’s Special Fund for victims of terrorism.] 2[(xiib) Chief Minister’s (Punjab) Relief Fund for Internally Displaced Persons (IDPs) of NWFP.] xiii. The Institutions of the Agha Khan Development Network (Pakistan) as contained in Schedule 1 of the Accord and Protocol, dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and the Agha Khan Development Network. xiv. The Liaquat National Hospital Association, Karachi. xv. The Pakistan Council of Scientific and Industrial Research. xvi. The Pakistan Water and Power Development Authority established under the Pakistan Water and Power Development Authority Act, 1958 (W. P. Act XXXI of 1958).] 3[xvii. WAPDA First Sukuk Company Limited.] 4[(xviii) Ð Micro Finance Banks for a period of five years starting from first day of July 2007: Provided such banks shall not issue dividends to their share holders and their profit and gain (if any) shall be utilized for Micro Finance Operations only.] 5[(xix) Pension of a former President of Pakistan and his widow under the President Pension Act, 1974 (IX of 1975). (xx) State Bank of Pakistan and State Bank of Pakistan Banking Services Corporation.] 6[(xxi) International Finance Corporation established under the International Finance Corporation Act, 1956 (XXVIII of 1956) and provided in section 9 of Article VI of Articles of Agreement 1955 as amended through April 1993;] 7[(xxii) Pakistan Domestic Sukuk Company Ltd;] 8[(xxiii) The Asian Development Bank established under the Asian Development Bank Ordinance, 1971 (IX of 1971) .] Clause xiia inserted vide SRO 390(I)/2009 dated the 19th May, 2009. Clause xiib inserted vide SRO 576(I)/2009 dated the 18th June, 2009 3 Sub-clause added vide SRO 864(I)/2006 dated the 22nd August, 2006. 4 Sub clause (XVIII) inserted by the Finance Act, 2007. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. EXEMPTION TO MICRO FINANCE BANKS (MFBs). [Second Schedule Part I, Clause (66)] Income of MFBs has been exempted for 5 years, starting from first day of July 2007 subject to following conditions. These banks will – (i) not issue dividends to their shareholders; and (ii) utilize their profits and gains for Micro Finance Operations only. 5 Sub-Clauses (xix) and (xx) omitted by the Finance Act, 2008. 6 Clause (xxi) inserted vide SRO 766(I)/2008 dated the 21st July, 2008. 7 Sub-Clause (xxii) inserted vide SRO 772(I)/2008 dated the 22nd July, 2008. 8 Sub-Clause (xxiii) inserted vide SRO 1012(I)/2008 dated the 23rd September, 2008. 1 2 2nd Sch. P. I 1[(xxiv) 242 The Income Tax Ordinance, 2001 The ECO Trade and Development Bank.] 2[(xxiv) The Islamic Chamber of Commerce and Industry under the Organization of Islamic Conference (OIC). (xxv) Commission on Science and Technology for Sustainable Development in South (COMSATS) formed under International Agreement signed on 5th October, 1994.] 3[(67) (68) (69) (70) (71A)] (71) Any income of Hamadard Laboratories (Waqf) Pakistan. 4[(72) Any profit on debt payable to a non-resident person,— (i) in respect of such private loan to be utilized on such project in Pakistan as may be approved by the Federal Government for the purposes of this clause, having regard to the rate of profit and the terms of repayment of the loan and the nature of project on which it is to be utilized; (ii) on a loan in foreign exchange against export letter of credit which is used exclusively for export of goods manufactured or processed for exports in Pakistan[.]5 6[(iii) being a foreign individual, company, firm or association of persons in respect of a foreign loan as is is utilized for industrial investment in Pakistan provided that the agreement for such loan is concluded on or after the first day of February, 1991, and is duly registered with the State Bank of Pakistan. Sub-Clause (xxiv) added vide SRO 810(I)/2009 dated the 19th September, 2009 Sub-Clauses (xxiv) & (xxv) added vide SRO 833(I)/2009 dated the 29th September, 2009 3 Clauses (67) to (71A) omitted by the Finance Act, 2006. The omitted clauses read as follows: (67) Any income of the Liaquat National Hospital Association, Karachi. (68) Any income derived by(i) Abdul Sattar Edhi Foundation, Karachi; and (ii) Bilquis Edhi Foundation, Karachi. (69) Any income derived by Al-Shifa Trust, Rawalpindi. (70) Any income derived by Fatimid Foundation, Karachi. 3[(71A) Any income of National Memorial Bab-e-Pakistan Trust for the assessment year commencing on or after the 1st day of July, 1994] 3 Clause (71A) inserted vide SRO 354(I)/2004 dated the 26th May, 2004 4 Clause (72) substituted by the Finance Act, 2006, the old clause (72) read as follows: (72) Any profit on debt payable to a non-resident person in respect of such private loan to be utilised on such project in Pakistan as may be approved by the Federal Government for the purposes of this clause, having regard to the rate of profit and the terms of re-payment of the loan and the nature of project on which it is to be utilised. 5 Full stop substituted for semi colon and clause (iii) omitted by the Finance Act, 2008, the omitted clause read as follows: (iii) being a foreign individual, company, firm or association of persons in respect of a foreign loan as is utilized for industrial investment in Pakistan provided that the agreement for such loan is concluded on or after the First day of February 1991, and is duly registered with the State Bank of Pakistan.] 6 Inserted vide the Finance Act, 2010 1 2 2nd Sch. P. I 243 The Income Tax Ordinance, 2001 Provided that this clause shall have retrospective effect of exemption to the agreements entered into in the past and shall not be applicable to new contracts after the 30th day of June, 2010, prospectively.] (73) [1] (74) (Any profit on debt derived by Hub Power Company Limited on or after the first day of July, 1991, on its bank deposits or accounts with [financial institutions] directly connected with financial transactions relating to the project operations. [(74A) Any profit on debt, payable to National Bank of Pakistan, on foreign currency loan of US $ 100 million, given to Pakistan State Oil Company Limited (PSO) under agreement executed at Bahrain on the 29th May, 2001, approved by the Federal Government vide Finance Division’s letter No.F.3(3)EF(BIII)/2001, dated the May 29, 2001.] (75) Any income of an agency of a foreign Government, a foreign national (company, firm or association of persons), or any other non-resident person approved by the Federal Government for the purposes of this clause, from profit on moneys borrowed under a loan agreement or in respect of foreign currency instrument approved by the Federal Government. (76) [4] (77) [5] (78) Any profit on debt derived from foreign currency accounts held with authorised banks in Pakistan, 6[or certificate of investment issued by investment banks] in accordance with Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan, by citizens of Pakistan and foreign nationals residing abroad, foreign association of persons, companies registered and operating abroad and foreign nationals residing in Pakistan. (79) Any profit on debt derived from a rupee account held with a scheduled bank in Pakistan by a citizen of Pakistan residing abroad, where the deposits in the said account are made exclusively from foreign 1 Clause (73) omitted by the Finance Act, 2006. The omitted clause read as follows: (73) Any profit on debt payable to a non-resident person on a loan in foreign exchange against export letter of credit which is used exclusively for export of goods manufactured or processed for exports in Pakistan. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. EXEMPTION FOR HUBCO. Profit on debt derived by Hub Power Company Ltd on its bank deposits or accounts with financial institutions was exempt under clause (74) of Part-I of the Second Schedule to the Income Tax Ordinance, 2001. Through an amendment in Finance Ordinance, 2003, the words “financial institutions” were substituted by the words “scheduled banks”. This amendment was considered as violating the spirit of concession granted to Hubco by the GOP in the Implementation Agreement dated 3rd August 1992. Therefore, for the words “scheduled banks” the words “financial institution” have been substituted in the said clause. This amendment will be retrospectively effective from July 01, 2003. 2 The words “scheduled banks” substituted by the Finance Act, 2005. This substitution shall be deemed to have been made w.e.f. July 01, 2003. Earlier the words “financial institutions” were substituted by the Finance Act, 2003. 3 Clause (74A) inserted vide SRO 754(I)/2007 dated the 27th July, 2007 4 Clause (76) omitted by the Finance Act, 2006. The omitted clause read as follows: (76) Any profit on debt payable to a non-resident person being a foreign individual, company, firm or association of persons in respect of a foreign loan as is utilised for industrial investment in Pakistan provided that the agreement for such loan is concluded on or after the First day of February 1991, and is duly registered with the State Bank of Pakistan. 5 Clause (77) omitted by the Finance Act, 2008, the omitted clause read as follows: Any profit derived by a non-resident person (whether a citizen of Pakistan or otherwise) in respect of the Islamic mode of financing, including istisna, morabaha, musharika5[.] 5 6 Substituted for “:” by the Finance Act, 2003 Inserted by the Finance Act, 2004. 2nd Sch. P. I 244 The Income Tax Ordinance, 2001 exchange remitted into the said account. (80) Any income derived from a private foreign currency account held with an authorised bank in Pakistan, 1[or certificate of investment issued by investment banks] in accordance with the Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan, by a resident individual who is a citizen of Pakistan: Provided that the exemption under this clause shall not be available in respect of any incremental deposits made in the said accounts on or after the 16th day of December, 1999, or in respect of any accounts opened under the said scheme on or after the said date. 2[ ] 3[(81A) Notwithstanding omission of clause (81), the existing holders of Foreign Currency Bearer Certificate shall continue to have the benefit of exemption till such certificates are encashed.] (82) [4] (83) [5] 6[(84)] 7[(85)] Inserted by the Finance Act, 2004. Omitted by the Finance Act, 2004. The omitted clause (81) read as follows: “(81) The income of a person, other than a bank or a financial institution, by way of interest on Foreign Currency Bearer Certificates issued under the Three-Years Foreign Currency Bearer Certificate Rules, 1997.” 3 Inserted by the Finance Act, 2004. 4 Clause (82) omitted by the Finance Act, 2008, the omitted clause read as follows: Any profit on Special US Dollar Bonds issued under the Special US Dollar Bonds Rules, 1998: Provided that the exemption under this clause shall not apply to profits on the said bonds purchased by a resident person out of any incremental deposits made in the foreign currency accounts on or after the 16th day of December, 1999, or out of new accounts opened on or after the said date. 5 Clause (83) omitted by the Finance Act, 2008, the omitted clause read as follows: Any profit on debt derived from Pak rupees account or certificates of deposit which have been created by conversion of a foreign currency account or deposit held on the 28th day of May, 1998, with a bank authorised under the Foreign Currency Accounts Scheme of State Bank of Pakistan: Provided that nothing contained in this clause shall apply to such Pak rupee account or certificates which are created out of foreign currency deposits which are not exempt under clause (78) 5[and (80).] 5 Inserted by the Finance Ordinance, 2002 and shall be deemed to have been so inserted from 5th August, 1998. 6 Omitted by the Finance Act, 2004. The omitted clause (84) read as follows: Any profit on debt received from a Pakistani bank by a foreign bank, approved by the Federal Government for the purposes of this clause, for such period as may be determined by the Federal Government: Provided that(i) the profit is earned on deposits comprising of remittances from abroad held in a rupee account opened with a Pakistani bank with the prior approval of the State Bank of Pakistan; (ii) the Pakistani bank maintaining the said rupee account holds 20 per cent or more of the equity capital of the said foreign bank and the management of the latter vests in the Pakistani bank; and (iii) the rate of profit chargeable on the said deposits does not exceed the rate of interest chargeable on the deposits in the foreign currency accounts allowed to be opened with banks in Pakistan by the State Bank of Pakistan.” 7 Omitted by the Finance Ordinance, 2002. The omitted clause (85) read as follows: “(85) Any income derived by any person, not being a bank, a banking company, financial institution, a development financing institution or a company engaged in the business of insurance, by way of return on bearer bonds issued by the Pakistan Water and Power Development Authority, established under the Pakistan Water and Power Development Authority Act, 1958 (West Pakistan Act. No.( XXXI of 1958): Provided that nothing contained in this clause shall apply in respect of return on bonds issued on or after the first day of July, 1991.” 1 2 2nd Sch. P. I 245 The Income Tax Ordinance, 2001 1[(86)] 2[(87)] 3[(88)] 4[(88A) Notwithstanding omission of clause (88), the existing holders of Federal Government Securities and redeemable capital shall continue to have benefit of exemption till the maturity of the securities and redeemable capital.] 5[(88)] (90) Any profit on debt payable by an industrial undertaking in Pakistan (i) on moneys borrowed by it under a loan agreement entered into with any such financial institution in a foreign country as may be approved in this behalf by the Federal Government by a general or special order; and (ii) on moneys borrowed or debts incurred by it in a foreign country in respect of the purchase outside Pakistan of capital plant and machinery in any case where the loan or debt is approved by the Federal Government, having regard to its terms generally and in particular to the terms of its payment, from so much of the tax payable in respect thereof as exceeds the tax or taxes on income paid on such interest in the foreign country from which the loan emanated or in which the debt was incurred (hereinafter referred to as the `said country'): Provided that, where the amount of such tax or taxes paid in the said country exceeds the amount of the tax payable in Pakistan, no refund of the amount paid in excess shall be allowed: Provided further that, where the said country exempts such interest or allows credit against its own tax for the tax which would have been payable in Pakistan if the said interest were liable to tax in Pakistan, no tax shall be payable in Pakistan in respect of such interest. 1 Omitted by the Finance Ordinance, 2002. The omitted clause (86) read as follows: “(86) Any income derived by any person, being an individual, by way of return on bearer or registered bonds (Second issue, 1989), issued by the Pakistan Water and Power Development Authority, established under the Pakistan Water and Power Authority Act, 1958 (West Pakistan Act, No. XXXI of 1958): Provided that nothing contained in this clause shall apply in respect of return on bonds issued on or after the first day of July, 1991.” 2 Omitted by the Finance Act, 2003. The omitted clause (87) read as follows: “(87) Any income derived by a non-resident person from foreign investment in 7th issue of Pak rupee denominated WAPDA Energy Bonds issued under the WAPDA Energy Bonds (7th Issue) Regulations, 1997.” 3 Omitted by the Finance Act, 2004. The omitted clause (88) read as follows: “(88) Any income derived by a non-resident person(excluding local branches, subsidiaries or offices of foreign banks, companies, associations of persons or any other person operating in Pakistan) from Federal Government securities and redeemable capital, as 3A[defined] in the Companies Ordinance, 1984, (XLVII of 1984) listed on a registered stock exchange, where the investments are made exclusively from foreign exchange remitted into Pakistan through a Special Convertible Rupee Account maintained with a bank in Pakistan.” 3A[Earlier the word “define” substituted by the Finance Act, 2003. 4 Inserted by the Finance Act, 2004. 5 Omitted by the Finance Ordinance, 2002. The omitted clause (89) read as follows: “(89) Any income derived by an individual or association of persons from rated and listed Term Finance Certificates being the instruments of redeemable capital under the Companies Ordinance 1984, issued on or after the 14th day of September 1997: Provided that the exemption under this clause shall not apply in respect of any assessment year commencing on, or after, the first day of July, 2002.” 2nd Sch. P. I 246 The Income Tax Ordinance, 2001 (91) Any income of a text-book board of a Province established under any law for the time being in force, accruing or arising from the date of its establishment. (92) Any income of any university or other educational institution established solely for educational purposes and not for purposes of profit. 1[(92A) Any income of any university or any other educational institution established in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA, for a period of two years ending on the 30th day of June, 2011] (93) Profits and gains derived by a taxpayer from the running of any computer training institution or computer training scheme, recognized by a Board of Education or a University or the University Grant Commission, as the case may be, set up between the first day of July, 1997, and the thirtieth day of June, 2005, both days inclusive, for a period of five years beginning with the month in which such institution is set up: Provided that a computer training institution or computer training scheme approved by the Federal Board of Revenue before the first day of July, 2000 shall continue to avail exemption under this clause till the expiry of the specified period. 2[(93A) Profits and gains derived by a taxpayer from the running of any vocational institute or technical institute or poly-technical institute, recognized by a Board of Technical Education or a university or any other authority appointed in this behalf by the Federal Government or a Provincial Government, as the case may be, set up between the first day of July, 2004, and the thirtieth day of June, 2008, both days inclusive, for a period of five years beginning from the tax year in which such institution is recognized.] 3(94)] 4[(95) (96) (97)] (98) Any income derived by any Board or other organization established 5[ ] in Pakistan for the purposes of controlling, regulating or encouraging major games and sports recognised by Government6[; Provided that the exemption of this clause shall not be applicable to the Pakistan Cricket Board.] 7[(98A) Any income derived by International Cricket Council Development (International) Limited (IDI), International Cricket Council (ICC), employees, officials, agents and representatives of Clause (92A) inserted vide the Finance Act, 2010. Inserted by the Finance Act, 2004. 3 Omitted by the Finance Ordinance, 2002. The omitted clause (94) read as follows: “(94) Any amount paid by way of Federal Educational Fee or expended on setting up and managing or running of a middle, high or technical school in accordance with the conditions laid down in the Federal Education Fee Scheme.” 4 Clauses (95) to (97) omitted by the Finance Act, 2006. The omitted clauses read as follows: (95) Any income derived by the Pakistan Council of Scientific and Industrial Research. (96) Any income derived by the Institution of Engineers, Pakistan, Lahore. (97) Income of Pakistan Agricultural Research Council, Islamabad. 5 Words “by Government” omitted by the Finance Act, 2003 6 Substituted for full stop and proviso inserted by the Finance Act, 2008. 7 Cluase (98A) inserted vide SRO 490(I)/2008 dated the 31st May, 2008. 1 2 2nd Sch. P. I 247 The Income Tax Ordinance, 2001 IDI and ICC, officials from ICC members, players, coaches, medical doctors and officials of member countries, IDI partners and media representatives, other than persons who are resident of Pakistan, from ICC Champions Trophy, 2008 hosted in Pakistan.] (99) 1[Any income derived by a Collective Investment Scheme or a REIT Scheme, if not less than ninety per cent of its accounting income of that year, as reduced by capital gains whether realized or unrealized, is distributed amongst the unit or certificate holders or shareholders as the case may be. Explanation.— For the purpose of this clause the expression “accounting income” means income calculated under the generally accepted Accounting Principles and verified by the auditors.] 2[(99A) ÐProfits and gains accruing to a person on sale of immovable property to a 3[REIT Scheme] upto thirtieth day of June, 4[2015].] (100) Any income, not being income from trading activity, of a modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), for any assessment year commencing on or after the first day of July, 1999 [:] Provided that not less than ninety per cent of its total profits in the year as reduced by the amount transferred to a mandatory reserve, as required under the provisions of the said Ordinance or the rules made 6[thereunder, as are distributed amongst the shareholders]: Clause (99) substituted by the Finance Act, 2008, the replaced clause read as follows: [Any income derived by a mutual fund or an investment company registered under the 1[Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003], or a unit trust scheme constituted by an assets management company registered under the Assets Management Companies Rules 1995 1[or a Real Estate Investment Trust approved and authorized under Real Estate Investment Trust Rules, 2006, established and managed by a REIT Management Company licensed under the Real Estate Investment Trust Rules, 2006], if not less than ninety percent of its accounting income of that year as reduced by capital gains whether realised or unrealised is distributed amongst the unit or certificate holders or the shareholders as the case may be. Explanation: For the purpose of this clause the expression "accounting income" means income calculated under the Generally Accepted Accounting Principles and verified by the auditors.] 1 1 1 SECTION 8 OF IT CIRCULAR DATED THE 27TH JUNE, 2006. TAXATION OF STOCK MARKET TRANSACTIONS. [Second Schedule, Part I, Clause (99)] Income Tax was introduced through the Finance Act, 2004, to stock market in the form of withholding tax, as under: Purchase of shares in lieu of commission earned by members 5% Sale of shares in lieu of commission earned by members 5% Value of the shares traded (Sale) 5% Financing of carry over trade (Badla) in shares by the members of stock exchanges on amount of carry over Capital Value Tax (CVT) % on the purchase value of shares @ Rate of WHT on all trading transactions made in the stock exchanges has been increased as under (i) ase of purchase of shares % of purchase value (ii) ase of sale of shares % of sale value (iii) ase of trading of shares % of traded value In case of financing of carry over trades (Badla)/CFS the existing rate of 10% has been retained. However, CVT on purchase value of shares has been enhanced from the 0.01% to 0.02%. 1 The words, comma and figures “Investment Companies and Investment Advisers Rules, 1971” substituted by the Finance Act, 2005. 1 Inserted by the Finance Act, 2006. 2 Clause (99A) inserted by the Finance Act, 2007. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. EXEMPTION TO SELLER OF REAL ESTATE TO REIT. [Second Schedule Part I, Clause (99A)] A new clause (99A) has been inserted in Part I of the Second Schedule providing exemption to profits and gains accruing/arising to a person on sale of immovable property to a Real Estate Investment Trust (REIT) upto 30th June 2010. The provisions of this clause will apply where transactions of sale have been made from 1st July 2007 onwards. 3 Substituted for “real estate investment trust” by the Finance Act, 2008. 4 Substituted for “2010” vide the Finance Act, 2010. 5 Substituted for “;” by the Finance Act, 2003 6 Substituted for “thereafter” by the Finance Act, 2003 2nd Sch. P. I 248 The Income Tax Ordinance, 2001 Provided further that with effect from the first day of July, 1999 for the purpose of determining the distribution of ninety per cent profits, the profits distributed through bonus certificates or shares to the certificate holders shall not be taken into account. Î (101) Profits and gains derived between the first day of July, 2000 and the thirtieth day of June, 1[2014] both days inclusive, by a venture capital company and venture capital fund registered under Venture Capital Companies and Funds Management Rules, 2000 2[and a Private Equity and Venture Capital Fund]. (102) [3] [(102A) Income of a person as represents a subsidy granted to him by the Federal Government for the purposes of implementation of any orders of the Federal Government in this behalf.] 4 5[(103) Any distribution received by a taxpayer from a collective investment scheme registered by the Securities and Exchange Commission of Pakistan under the Non-Banking Finance Companies and Î EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. EXEMPTION TO PRIVATE EQUITY AND VENTURE CAPITAL FUND: [Second Schedule Part I, Clause (101)] Income Tax Ordinance provides exemption to profits and gains of Venture Capital Companies and Venture Capital Funds upto June 2014. Venture Capital Funds have since been replaced with Private Equity and Venture Capital Funds and new rules to this effect have been framed by SECP being a regulatory authority. Since exemption to venture capital funds is already available in the law, it has been decided that this exemption may also be extended to Private Equity and Venture Capital Funds. For this purpose amendment has been made in clause (101) of Part I of the Second Schedule to the Income Tax Ordinance, 2001. Income Tax Cir. No. 1 dated the 1st July, 2006 VENTURE COMPANIES – EXTENSION IN EXEMPTION AFTER JUNE 2007. [Second Schedule, Part I, Clause (101)] Exemption to profit and gains derived by the Venture Capital Company (VCC) and Venture Capital Fund (VCF) registered under Venture Capital Companies and Funds Management Rules, 2000, was introduced in the Repealed Income Tax Ordinance, 1979 for a period of seven years effective from July 1, 2000. This sector is not fully developed so far. Therefore, exemption to income of Venture Capital Companies and Venture Capital Funds has been extended upto 2014. 1 Substituted for “2007” by the Finance Act, 2006. 2 Words inserted by the Finance Act, 2007. 3 Clause (102) omitted vide the Finance Act, 2010, the omitted text read as follows: Any dividend received by the Investment Corporation of Pakistan from any other company which has paid or will pay tax in respect of the profits out of which such dividends are paid. Income Tax Cir. No. 1 dated the 1st July, 2006 EXEMPTION FOR SUBSIDIES PROVIDED BY FEDERAL GOVERNMENT. [Clause (102A) Part I of the Second Schedule] It is common practice that Governments have to allow subsidies to their agencies/departments to meet the cost differentials in order to carry out their plans/projects. This is often necessitated to provide relief to various segments of the society at large. Under the existing scheme of things, such subsidies are taxable. Now, subsidies granted by the Federal Government for the purposes of implementation of any approved assignment have been exempted from income tax. 4 Clause 102A added by the Finance Act, 2006. 5 Clause (103) substituted by the Finance Act, 2008, EXPLATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008EXEMPTION OF DISTRIBUTION OF “CAPTIAL GAINS” BY MUTUAL FUNDS ETC. – [Clause (103)]. Any income received by a taxpayer out of “capital gains” of National Investment (Unit) Trust or a collective investment scheme authorized or registered under the NBFC (Establishment and Regulation) Rules, 2003 or a private equity and venture capital fund, was exempt subject to the condition that tax has been paid on the said gains. Exemption from tax on “Capital Gains”, available under clause (110) has been extended upto tax year ending on June 30, 2010. In view of this extension, the condition of payment of tax under clause (103) has also been waived off and now, distribution of income relating to capital gains by the said entities would be exempt under clause (103) even if no tax is paid thereon. the replaced clause read as follows: Any distribution received by a taxpayer from the National Investment (Unit) Trust or 5[a collective Investment Scheme authorized or registered under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003] 5[or a Private Equity and Venture Capital Fund] out of the capital gains of the said Trust or Fund on which tax has already been paid. 5 The words, commas and figures “a Mutual Fund established by the Investment Corporation of Pakistan A[or an investment company registered under the Investment Companies and Investment Advisor Rules, 1971 or a unit trust scheme constituted by 2nd Sch. P. I 249 The Income Tax Ordinance, 2001 Notified Entities Regulations, 2007, including National Investment (Unit) Trust or REIT Scheme or a Private Equity and Venture Capital Fund out of the capital gains of the said Schemes or Trust or Fund]1[: Provided that this exemption shall be available to only such mutual funds, collective investment schemes that are debt or money market funds and these do not invest in shares.] 2[(103A) any income derived from inter-corporate dividend within the group companies entitled to group taxation under section 59AA 3[or section 59B].] 4[(103B) Any dividend in specie derived in the form of shares in a company, as defined in the Companies Ordinance, 1984 (XLVII of 1984) Provided that when such shares are disposed off by the recipient, the amount representing the dividend in specie shall be taxed in accordance with provisions of section 5 of this Ordinance and the amount, representing the difference between the consideration received and the amount hereinabove, shall be treated in accordance with the provisions of section 37 or section 37A, as the case may be.] (104) Any income derived by the Libyan Arab Foreign Investment Company being dividend of the PakLibya Holding Company. (105) Any income derived by the Government of Kingdom of Saudi Arabia being dividend of the SaudiPak Industrial and Agricultural Investment Company Limited. 5[(105A) Any income derived by Kuwait Foreign Trading Contracting and investment company or Kuwait Investment Authority being dividend of the Pak-Kuwait Investment Company in Pakistan from the year of incorporation of Pak-Kuwait Investment Company.] 6[(105B) Any income received by a taxpayer from a corporate agricultural enterprise, distributed as dividend out of its income from agriculture.] (106) [7] 1[Ê(106A) [2] an assets management company registered under the Assets Management Companies Rules, 1995]” substituted by the Finance Act, 2005. A Inserted by the Finance Ordinance, 2002. 5 Words inserted by the Finance Act, 2007. 1 Colon substituted for full stop and proviso inserted vide the Finance Act, 2010. 2 Clause (103A) inserted by the Finance Act, 2007. EXPLATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008EXEMPTION OF INTER-CORPORATE DIVIDEND TO COMPANIES ELIGIBLE FOR GROUP RELIEF – [Clause (103A)]. Inter Corporate dividend was exempted through Finance Act, 2007 where subsidiary companies are 100% owned by the Holding Company under a group covered by the provisions of section 59AA of the Ordinance. Clause (103A) of the Second Schedule has been amended to exempt inter-corporate dividend received by a company from another company in the group eligible for group relief under section 59B of the Ordinance. The ownership in a subsidiary – holding relationship should be 55% or more holding where one of the group companies is a company listed on a registered stock exchange and 75% or more holding where none of the company in the group is a listed company. The percentage ownership in both the cases has to be direct holding in the group. 3 Words inserted by the Finance Act, 2008. 4 Clause (103B) inserted vide the Finance Act, 2010. 5 Inserted vide SRO 749(I)/2004 dated 30th August, 2004 6 Clause (105B) inserted vide SRO 106(I)/2008 dated the 1st February, 2008. 7 Clause (106) omitted by the Finance Act, 2006. The omitted clause read as follows: (106) Any income derived by the Pakistan Water and Power Development Authority, established under the Pakistan Water and Power Development Authority Act, 1958 (West Pakistan Act. No. XXXI of 1958). 2nd Sch. P. I 250 The Income Tax Ordinance, 2001 (107) Any income derived by any subsidiary of the Islamic Development Bank wholly owned by it and set up in Pakistan and engaged in owning and leasing of tankers. [3] Í (110) [4] 5[(110A) [6] Inserted by the Finance Act, 2005. EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. EXEMPTION FOR CORPORATIZED ENTITIES OF WAPDA. In pursuance of ECC’s decision dated 13th January 1998, corporatized entities of WAPDA were granted three years exemption from income tax for the assessment years 1998-99, 1999-2000 and 2000-01. In the subsequent years, the income of such entities was liable to tax. Since the process of corporatization/commercialization is yet not complete as tariff is still to be notified, a new clause (106A) has been introduced in Part I of the Second Schedule and the corporatized entities of WAPDA have been allowed exemption retrospectively from the date of their creation upto the date of completion of the process of corporatization i.e. till the tariff is notified. 2 Clause (106A) omitted by the Finance Act, 2006. The omitted clause read as follows: (106A) Any income derived by the corporatized entities of Pakistan Water and Power Development Authority from the date of their creation upto the date of completion of the process of corporatization i.e. till the tariff is notified. 3 Omitted by the Finance Act, 2003. The clauses (108) & (109) are read as follows: “(108) Any income derived by the International Irrigating Management Institute (IIMI), Pakistan. (109) Any amount collected by the Civil Aviation Authority up to the thirty-first December, 1998, on account of security charges.” Í EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. EXTENSION OF EXEMPTION ON CAPITAL GAINS. [Second Schedule Part I, Clause (110)] The existing exemption under clause (110) on capital gain tax was available upto 30th June 2007. The period of exemption has been extended upto tax year ending on 30th June 2008. Likewise this exemption is also extended for insurance companies and amendment to this effect has also been made in clause (6A) of the Fourth Schedule to the Income Tax Ordinance, 2001. 4 Clause (110) omitted vide the Finance Act, 2010, the omitted clause read as follwos: Any income chargeable under the head "capital gains", being income from the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company (4[as defined in sub-section (47) of section 2]) and the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan, derived by a taxpayer 4[upto tax year ending on the thirtieth day of June, 4[2010]]. 4 The words “as defined in the First Schedule” substituted by the Finance Act, 2005. 4 Substituted for the words, comma and figure “in respect of any 1A[tax year 2005]” by the Finance Act, 2004. 1A[Earlier the words, comma and figures “assessment year ending on or before the 30th day of June, 2005” were substituted by the Finance Act, 2003. 4 Figure substituted for “2008” by the Finance Act, 2008, earlier it was “2007” substituted by the Finance Act, 2007. 5 Clause (110A) and (110B) inserted by the Finance Act, 2007. 6 Clause (110A) omitted vide the Finance Act, 2010, the omitted clause read as follows: Ï Any gain on transfer of a capital asset of the existing stock exchanges to new corporatized stock exchange, in the course of corporatization of an existing stock exchange. Ï EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. EXEMPTION OF GAINS ON TRANSFER OF CAPITAL ASSET DUE TO DEMUTALIZATION OF STOCK EXCHANGES. [Second Schedule Part I, Clause (110A) & (110B)] Demutualization is a process through which stock exchanges will convert into profit making public limited companies. As a result, capital assets of present stock exchanges will be transferred: (i) to new corporatized stock exchanges; and (ii) members of an existing stock exchange for; (a) acquisition of shares; and (b) trading and clearing rights acquired in the new corporatized stock exchanges. In order to facilitate the process of demutualization and corporatization of Stock Exchanges any gain on transfer of capital assets of the existing stock exchanges to new corporatized stock exchange has been exempted under newly inserted clause (110A). Similarly, any gain on transfer of a capital asset, being a membership right held by a member of an existing stock exchange for acquisition of shares or trading rights by such member in a newly corporatized stock exchange has also been exempted under clause (110B) of Part I of Second Schedule to the Income Tax Ordinance, 2001. 1 Ê 2nd Sch. P. I 251 The Income Tax Ordinance, 2001 (110B) Any gain on transfer of a capital asset, being a membership right held by a member of an existing stock exchange, for acquisition of shares and trading or clearing rights acquired by such member in new corporatized stock exchange in the course of corporatization of an existing stock exchange.] (111) [1] [2] (113) Any income chargeable under the head "capital gains", being income from the sale of shares of a public company set up in any Special Industrial Zone referred to in clause 3[(126)] of this Schedule, derived by a person for a period of five years from the date of commencement of its commercial production: Provided that the exemption under this clause shall not be available to a person from the sale of shares of such companies which are not eligible for exemption from tax under clause 4[(126)]. (114) Any income chargeable under the head "capital gains" derived by a person from an industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980). 5[(114A) Any income chargeable under the head “capitalgains”, derived by a person from sale of ships and all floating crafts including tugs, dredgers, survey vessels and other specialized craft upto tax year ending on the thirtieth day of June 2011.] (115) [6] (116) [7] (117) Any income derived by a person from plying of any vehicle registered in the territories of Azad Jammu and Kashmir, excluding income arising from the operation of such vehicle in Pakistan to a person who is resident in Pakistan and non-resident in those territories. 8(118)] 1 Clause (111) omitted vide the Finance Act, 2010, the omitted clause read as follows: Any income chargeable under the head “capital gains”, being income from the sale of shares of a public company derived by any foreign institutional investor as is approved by the Federal Government for the purpose of this clause. 2 Omitted by the Finance Ordinance, 2002. The omitted clause (112) read as follows: “(112) Any income chargeable under the head "capital gains" derived by a person from the sale of shares of industrial units of public sector corporations by the Privatisation Commission.” 3 Substituted for “(120)” by the Finance Act, 2003 4 Substituted for “(120)” by the Finance Act, 2003 5 Clause (114A) added by the Finance Act, 2006. 6 Omitted by the Finance Act, 2003. The omitted clause (115) read as follows: “(115) Any share of income received by a taxpayer out of capital gains on which tax has been paid by the firm of which he is a partner: 6[Provided that exemption under this clause shall not apply in respect of any tax year commencing on or after the 1st day of July, 2002.]” 7 Omitted by the Finance Ordinance, 2002, The omitted clause (116) read as follows: “(116) Any income derived by a taxpayer from the business of fish catching or fish processing, where the fish catching business or fish processing unit is established by the taxpayer for the first time between first day of July, 1993, and 30th day of June, 1997, for a period of five years from the date of such establishment, subject to the condition that the said date shall be determined by the Commissioner on an application made by the taxpayer.” 8 Omitted by the Finance Ordinance, 2002. The omitted clause (118) read as follows: “118) Profits and gains derived by a taxpayer from a pioneer industrial undertaking which is set up by 30th day of June, 2nd Sch. P. I 252 The Income Tax Ordinance, 2001 1[(119)] 2[(120)] 3[(121)] 4[(121)] 5[(122)] 1997 for a period of five years from the date of commencement of commercial production. The exemption under this clause shall apply to a pioneer industrial undertaking which (a) is owned and managed by a company formed and registered under the Companies Act, 1913, (VII of 1913), having its registered office in Pakistan; (b) is an undertaking the income, profits and gains of which are not liable to be computed in accordance with the rules contained in the Fifth Schedule; (c) fulfils the following conditions, namely :(i) that the undertaking is based on highly sophisticated technology; (ii) that the technology employed has fast obsolescence; (iii) that investment in the undertaking involves high risk; and (iv) that the goods produced, or to be produced, are such that neither these goods, nor identical or close substitutes thereof, are being produced in Pakistan; and (d) is approved, on an application made by the taxpayer in such form and manner and accompanied by such statements, certificates, documents and undertakings, and in accordance with such procedure, as may be prescribed, by the Central Board of Revenue.” 1 Omitted by the Finance Ordinance, 2002. The omitted clause (119) read as follows: “(119) Profits and gains derived by a taxpayer, being a resident company, from an industrial undertaking engaged in the manufacture of electronic equipment or components thereof which is set up in the North West Frontier Province or in the Islamabad Capital Territory by 30th day of June, 1997, and is approved by the Central Board of Revenue for purposes of this clause, for a period of five years from the date of commencement of commercial production.” 2 Clause (120) omitted by the Finance Act, 2006. The omitted clause read as follows: (1) Profits and gains derived by a taxpayer from an industrial undertaking for a period of five years from the date of commencement of commercial production. (2) The exemption under this clause shall apply to an undertaking which is(a) set up between the first day of July, 1994, and the thirtieth day of June,2000, both days inclusive; (b) owned and managed by a company formed exclusively for operating the said industrial undertaking engaged in fruit processing and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan; and (c) is not formed by splitting up or the reconstruction or reconstitution of business already in existence or by transfer to a new business of any machinery or plant in Pakistan at any time before the commencement of the new business. 3 Omitted by the Finance Act, 2003 (2nd time). The omitted clause (121) read as follows which was inserted through SRO 596(I)/2002 dated the 5th September, 2002: “3[(121) Profits and gains derived by an assessee from an Industrial undertaking set up in an area declared by the Federal Government to be a “Zone” within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980) for the assessment years 1998-1999,1999-2000 and 2000-2001. However, exemption under this clause shall be restricted to the remaining period of exemption to which a company was entitled before the relevant amendments made by the Finance Act, 1996 (IX of 1996).]” 4 Omitted by the Finance Ordinance, 2002. The omitted clause (121) read as follows: “(121) (1) Profits and gains derived by a taxpayer from an industrial undertaking for a period of five years from the date of commencement of commercial production. (2) The exemption under this clause shall apply to an Industrial undertaking which is(a) set up between the first day of July, 1994, and the thirtieth day of June, 2000, both days inclusive; (b) owned and managed by a company formed exclusively for operating the said industrial undertaking engaged in the manufacture of soft and stuffed toys; and (c) not formed by splitting up, reconstruction or reconstitution of business already in existence or by transfer to a new business of any machinery or plant in Pakistan at any time before the commencement of the new business.” 5 Omitted by the Finance Ordinance, 2002. The omitted clause (122) read as follows: “ (122) (1) Profits and gains derived by a taxpayer from an industrial undertaking for a period of five years from the date of commencement of commercial production. (2) The exemption under this clause shall apply to an industrial undertaking which is (a) engaged in the manufacture of solar thermal, photovoltaic equipment for production of solar energy and solar appliances; (b) set up between the first day of July, 1997 and the thirtieth day of June, 2000; and 2nd Sch. P. I 253 The Income Tax Ordinance, 2001 1[(123)] 2[(124)] 3[(125)] (126) (1) Profits and gains derived by a taxpayer from an industrial undertaking set up between the first day of July, 1995, and the 4[31st day of December, 2002], both days inclusive, for a period of ten years beginning with the month in which the undertaking is set up or commercial production is commenced, whichever is the later: Provided that the exemption under this clause shall not be available after the 31st January, 1996, except to such taxpayers, otherwise qualifying under this clause, who have established letters of credit for the import of plant and machinery for such industrial undertaking by the 31st January, 1996: 5[Provided further that the extension in deadline from the 30th June, 1999, to the 31st December, 2002, shall not apply to those projects whose cases are sub judice and that the Federal Government shall decide such cases in accordance with the verdict of the apex Court.] (2) The exemption under this clause shall apply to an industrial undertaking which fulfils the following conditions, namely :(a) that it is set up in such area as may be notified by the Federal Government to be a Special Industrial Zone ; (b) that it is not formed by the splitting up, or the reconstruction or reconstitution of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business ; (c) is not formed by splitting up or the reconstruction or reconstitution of business already in existence or by transfer to a new business of any machinery or plant in Pakistan at any time before the commencement of the new business.” 1 Omitted by the Finance Ordinance, 2002. The omitted clause (123) read as follows: “(123) Profits and gains derived by a taxpayer from an industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980), for a period of five years from the date of commencement of production, and for such further period as may be allowed by the Federal Government: Provided that nothing contained in this clause shall apply to an industrial undertaking set up after the 30th June, 1997.” 2 Omitted by the Finance Ordinance, 2002. The omitted clause (124) read as follows:: “ (124) Profits and gains derived by a taxpayer up to the thirtieth day of June, 1997, from an industrial undertaking set up in the Karachi Export Processing Zone, declared by the Federal Government as a `Zone' within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980).” 3 Omitted by the Finance Ordinance, 2002. The omitted clause (125) read as follows:: “(125) (1) Profits and gains derived by a company for a period of five years from an industrial undertaking set up in such area and within such period and on such conditions as the Federal Government may, by notification in the Official Gazette, specify: Provided that the exemption under this sub-clause shall not be available after the 31st January, 1996, except to such companies otherwise qualifying under this clause, which have established letters of credit for the import of plant and machinery for such industrial undertaking by the 31st January, 1996. (2) Income chargeable under the head "Capital gains" derived by a taxpayer from the sale of shares representing foreign equity in such company and on such conditions as the Federal Government may, by notification in the official Gazette, specify: Provided that the exemption under this sub-clause shall not be available to a taxpayer from the sale of shares representing foreign equity in such companies which do not qualify for exemption under sub-clause (1).” 4 Substituted for the words, comma and figure “thirtieth day of June, 1999” by the Finance Ordinance, 2002. 5 Added by the Finance Ordinance, 2002. 2nd Sch. P. I 254 The Income Tax Ordinance, 2001 (c) that it is owned and managed by a company formed exclusively for operating such industrial undertaking and registered under the Companies Ordinance, 1984 (XLVII of 1984), having its registered office in Pakistan ; and (d) that it is not engaged in the manufacture of arms and ammunition, security printing, currency and mint, high explosives, radioactive substances, alcohol (except industrial alcohol), cotton ginning, spinning (except as part of integrated textile 1[unit]), sugar manufacturing (white), flour milling, steel re-rolling and furnace, Tobacco industry, ghee or vegetable oil industry, plastic bags (including Polyropylene, and Polyethylene), beverages (excluding fruit juices), polyester industry, automobile assembly and cement industry. 2[(126A) (a) income derived by – Gwadar Free Zone Company Limited; 3[(b) PSA Gwadar International Terminal Limited; (c) Gwadar Marine Services Limited; and 4[(d) P.S.A Gwadar (PTE) Ltd.] 5[(126B) Profit and gains derived by 6[Khalifa Coastal Refinery] for a period of twenty years beginning in the month in which the refinery is setup or commercial production is commenced, which ever is the later.] 7[(126C) (1) Profits and gains derived by a taxpayer from an industrial undertaking set up in Larkano Industrial Estate between the 1st day of July, 2008 and the thirtieth day of June, 2013, both days inclusive, for a period of ten years beginning with the month in which the industrial undertaking is set up or commercial production commenced, whichever is the later. (2) Exemption under this clause shall apply to an industrial undertaking which is owned and managed by a company registered under the Companies Ordinance 1984 (XLVII of 1984) and formed exclusively for operating the said undertaking.] 8[(126D) Profit and gains derived by a taxpayer from an industrial undertaking set up in the Gwadar declared by the Federal Government to be a Zone within the meaning of Export Processing Zone Authority Ordinance, 1980 (IV of 1980) as Export Processing Zone, Gwadar, for a period of ten years beginning with the month and year in which the industrial undertaking is set up or commercial operation commenced, whichever is later.] The word “unite” substituted by the Finance Act, 2005. Clause (126A) inserted vide SRO 755(I)/2007 dated the 27th July, 2007 3 Sub clauses (b) and (c) substituted and (d) inserted vide SRO 41(I)/2008, the old wordings read as follows: (b) PSA Gwadar International Terminal Limited; and (c) Gwadar Marine Services Limited, from Gwadar Port operations for a period of twenty years beginning from the year in which the company is set up or commercial operation is commenced, which ever is the later. 4 Sub Clause (d) substituted vide SRO 152(I)/2008 dated the 16th February, 2008, the old subclause read as follows: (d) Port of Singapore Authority International (PTE) Ltd (PSAI)] 5 Clause (126B) inserted vide SRO 1100(I)/2007 dated the 10th November, 2007. 6 Substituted for “Coastal Oil Refinery at Khalifa Point by IPIC of Abu Dhabi” vides SRO 1145(I)/2007 dated the 23rd November, 2007. 7 Clause (126C) inserted vide SRO 741(I)/2008 dated the 10th July, 2008. 8 Clause (126D) inserted vide SRO 606(I)/2009 dated the 29th June, 2009. 1 2 2nd Sch. P. I 255 The Income Tax Ordinance, 2001 1[(126E) Income derived by Corporate zone developers for projects in the Special Economic Zones as announced by the Federal Government for a period of ten years from the date of start of developmental activity.] 2[(126F) Profits and gains derived by a taxpayer located in the most affected and moderately affected areas areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010: Provided that this concession shall not be available to the manufacturers and suppliers of cement, sugar, beverages and cigarettes;] 3[(127)] 4[(128)] 5[(129)] Clause (126E) inserted vide SRO 660(I)/2009 dated the 16th July, 2009. Clause (126F) inserted vide the Finance Act, 2010. 3 Omitted by the Finance Ordinance, 2002. The omitted clause (127) read as follows: “(127) (1) Profit and gains derived by a taxpayer from an industrial undertaking set up between the first day of July, 1995, and the thirtieth day of June,1997, both days inclusive, for a period of eight years beginning with the month in which commercial production is commenced. “(2) The exemption under this clause shall apply to an industrial undertaking which fulfils the following conditions, namely :(i) It is set up in a rural area i.e., outside the limits of any municipal corporation, municipal committee, cantonment board or Islamabad Capital Territory and in no case within the following areas namely :(a) up to ten kilometres from the municipal or cantonment limits of Karachi or Lahore; and (b) up to ten kilometres form the existing limits of municipal corporations or cantonments boards; Explanation. The distance between an industrial undertaking and the outer boundary of a municipal or cantonment limit shall be measured in a straight line on horizontal plane as provided in section 11 of the General Clauses Act, (X of 1897), and the said distance, wherever required, will be defined and determined by the concerned officer of the District Administration. (ii) It is not formed by the splitting up, or the reconstruction or reconstitution of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business. (iii) It is owned and managed by a company formed for operating such industrial undertaking and registered under the Companies Ordinance, 1984 (XLVII of 1984), having its registered office in Pakistan. (iv) It is an undertaking engaged in any of the following agro-based industries:(a) cultivation, production, processing and preservation of flowers and ornamental plants; (b) cattle, sheep and goat forming for the production and processing of meat. It will cover rearing, sale and slaughtering of animals and processing and packing of meat and meat products; (c) dairy farming for the production of milk; (d) processing, packing, preservation and canning of milk and milk products with or without addition of other things; (e) processing, packing, preservation and canning of meat and meat products; (f) processing, packing, preservation and canning of fruits and vegetable; (g) inland farming and preservation, packing and canning of fish and seafood with or without addition of other things; (h) cultivation, production and multiplication of high yielding seeds of cereals, pulses, vegetables, fruits, oilseeds, and cash crops like sugarcane, cotton coca, coffee, tea, herbs and spices; (i) cultivation, production and extraction of edible oils; (j) poultry farming and processing, packing, preservation and canning of poultry meat with or without addition of other things; and (k) manufacture of cattle and poultry feeds.” 4 Omitted by the Finance Ordinance, 2002. The omitted clause (128) read as follows: “ (128) Any income accruing or arising outside Pakistan to an industrial undertaking set up in an area declared by the Federal Government to be a `Zone' within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980), provided the said income accrues or arises from such activities of the said undertaking as are approved by the Federal Government: Provided that nothing contained in this clause shall apply to an industrial undertaking set up after the 30th June, 1997.” 5 Omitted by the Finance Act, 2003. The omitted clause (129) read a follows: “(129) Any income of Saudi-Pak Industrial and Agricultural Investment Company Limited in Pakistan for a period of twenty years commencing with the thirty-first day of December, 1982.” 1 2 2nd Sch. P. I 256 The Income Tax Ordinance, 2001 1[(130)] (131) Any income(a) of company registered under the Companies Ordinance 1984 (XLVII of 1984), and having its registered office in Pakistan, as is derived by it by way of royalty, commission or fees from a foreign enterprise in consideration for the use outside Pakistan of any patent, invention, model, design, secret process or formula or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided to such enterprise by the company or in the consideration of technical services rendered outside Pakistan to such enterprise by the company under an agreement in this behalf, or (b) of any other taxpayer as is derived by him, in the income year relevant to assessment year beginning with the first day of July, 1982 and any assessment year thereafter, by way of fees for technical services rendered outside Pakistan to a foreign enterprise under an agreement entered into in this behalf :Provided that(i) such income is received in Pakistan by or on behalf of the said company or other taxpayer, as the case may be, in accordance with the law for the time being in force for regulating payments and dealings in foreign exchange ; and (ii) where any income as aforesaid is not brought into Pakistan in the year in which it is earned and tax is paid thereon, an amount equal to the tax so paid shall be deducted from the tax payable for the year in which it is brought into Pakistan and, where no tax is payable for that year or the tax payable is less than the amount to be deducted, the whole or such part of the said amount as is not deducted shall be carried forward and deducted from the tax payable for the year next following and so on. (132) Profits and gains derived by a taxpayer from an electric power generation project set up in Pakistan on or after the 1st day of July, 1988. The exemption under this clause shall apply to such project which is(a) owned and managed by a company formed for operating the said project and registered under the Companies Ordinance, 1984 (XLVII of 1984), and having its registered office in Pakistan; (b) not formed by the splitting up, or the reconstruction or reconstitution, of a business already in existence or by transfer to a new business of any machinery or plant used in a business which was being carried on in Pakistan at any time before the commencement of the new business; and (c) owned by a company fifty per cent of whose shares are not held by the Federal Government or Provincial Government or a local authority or which is not controlled by the Federal Government or a Provincial Government or a local authority: Provided that the condition laid down in sub-clause (a) shall not apply to the Hub Power Company Limited2[: 1 Omitted by the Finance Ordinance, 2002. The omitted clause (130) read as follows: “(130) Any income of Pakistan-Kuwait Investment Company in Pakistan for a period of twenty years from the date of its incorporation.” Proviso substituted for "Provided further that with effect from the 22nd October, 2002, exemption under this clause shall not be available to any oil fired power plant". (It was inserted by SRO 940(I)/2002 dated 19th December, 2002) by SRO 44(I)/2003 dated 11th January, 2003. 2 2nd Sch. P. I 257 The Income Tax Ordinance, 2001 Provided further the exemption under this clause shall not apply to oil fired power plants setup 22nd October, 2002 and 30th June, 2006] 2[but shall apply to Dual Fuel (Oil/Gas) power projects set up on or after the first September, 2005]] 3[: 1[between Provided further that the exemption under this clause shall be available to companies registered in Pakistan or Azad Jammu and Kashmir owning and managing Hydel Power Projects, set up in Azad Jammu and Kashmir or Pakistan] 4[: Provided further that exemption under this clause shall also be available to the expansion projects of the existing Independent Power Projects already in operation.] 5[(132A) Profit and gains derived by Bosicor Oil Pakistan Limited for a period of seven and half years beginning from the day on which the refinery is set up or commercial production is commenced which ever is later.] 6[(132A) [7] 8[9(133) Income from exports of computer software or IT services or IT enabled services upto the period ending on 30th day of June, 2016. Explanation.- For the purpose of this clause (a) “IT Services” include software development, software maintenance, system integration, web design, web development, web hosting, and network design, and (b) "IT enabled services” include inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centers, data entry operations 10[, locally produced television programs] and insurance claims processing. 11[(133A] [12] Substituted for “on or after 22nd October, 2002” by the Finance Act, 2006. Words inserted vide SRO 1009(I)/2005 dated the 26th September, 2005. 3 Colon and proviso inserted by the Finance Act, 2007. 4 Colon and proviso inserted vide SRO 405(I)/2008 dated the 26th April, 2008. 5 Clause (132A) inserted vide SRO 650(I)/2009 dated the 9th July, 2009. 6 Inserted by the Finance Ordinance, 2002. 7 Clause (132A) omitted by the Finance Act, 2008, the omitted clause read as follows: Payments made on or after the first day of July, 1991, for the supply of plant, equipment and machinery to Hub Power Company Limited by a non-resident being a foreign individual, company, firm or association of persons. 8 Clause (133) substituted for “(133) Income from export of computer software and its related services developed in Pakistan: Provided that the exemption under this clause shall not be available after the 30th day of June, 2016.” By the Finance Act, 2003 9 Income Tax Cir. No. 1 dated the 1st July, 2006 EXEMPTION FOR EXPORT OF LOCALLY DEVELOPED TELEVISION PROGRAMS. [Second Schedule, Part I, Clause (133)] Income Tax law allows exemption upto 2016 for “I.T enabled services” which include call centres, medical transcriptions, accounting services. HR services and graphics design etc. To boost exports through cultural activities, the exports of locally developed television programs have been exempted from income tax. 10 Words inserted by the Finance Act, 2006. 11 Inserted by the Finance Act, 2005. 12 Clause (133A) omitted by the Finance Act, 2008, the omitted clause read as follows: 12Any income derived by an individual from transfer of his membership rights or shares of a stock exchange in Pakistan 12[along with a room in the Stock Exchange] to a company at any time between the first day of July, 2005, and the thirtieth day of June, 12[2008]. 1 2 2nd Sch. P. I 258 The Income Tax Ordinance, 2001 1[(134)] (135) Any amount received on encashment of Special US Dollar Bond issued under the Special US Dollar Bonds Rules, 1998. (136) Any income of a special purpose vehicle as defined in the Asset Backed Securitization Rules, 1999 made under the Companies Ordinance, 1984 (XLVII of 1984): Provided that, if there is any income which accrues or arises in the accounts of the special purpose vehicle, after completion of the process of the securitization, it shall be returned to the Originator as defined by the said rules within the income year next following the year in which the income has been determined and such income shall be taxable in the hands of the Originator. 2[ Ê (137) [3] (138) [4] 5[(139) (a) The benefit represented by free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. ONE TIME EXEMPTION ON CORPORATIZATION OF INDIVIDUAL STOCK EXCHANGE MEMBERSHIP. A onetime exemption on income from transfer of individual membership to a company was allowed in the past. Since this incentive had improved the quality of intermediation in capital market transactions, therefore, a new clause (133A) has been inserted in Part I of the Second Schedule to provide another onetime exemption on such income relevant to incorporations in the period July 1, 2005 to June 30, 2006. 12 Words inserted by the Finance Act, 2006. 12 Substituted for “2007” by the Finance Act, 2007, it was earlier substituted for 2006 by the Finance Act, 2006. 1 Omitted by the Finance Act, 2003. The omitted clause (134) read as follows: “(134) Any amount received on encashment of any certificate issued in pursuance of the US Dollar Bearer Certificate Rules, 1991: Provided that exemption under this clause shall not be available in respect of certificates purchased on or after the 15 June, 1995.” 2 Inserted by the Finance Act, 2005. Earlier clause (137) was omitted by the Finance Act, 2003. The omitted clause (137) read as follows: “(137) Payments made on or after the first day of July, 1991, for the supply of plant, equipment and machinery to Hub Power Company Limited by a non-resident person.” Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. EXEMPTION TO M/S FUGRO GEODETIC LIMITED. A new clause (137) has been introduced in Part I of the Second Schedule, by virtue of which income of M/S FUGRO GEODETIC LIMITED derived from execution of contract from “survey for the establishment of the Continental Shelf of Pakistan” shall be exempt from income tax. 3 Clause (137) omitted by the Finance Act, 2006. The omitted clause read as follows: Income of Fugro Geodetic Limited from execution of contract with the Government of Pakistan for survey for the establishment of the Continental Shelf of Pakistan. 4 Clause 138 omitted by the Finance Act, 2008, the omitted clause read as follows: Any income referred to in Section 3.4 (a) of the Facilitation Agreement between the President of the Islamic Republic of Pakistan and the taxpayer purchasing the Kot Addu Power Station from Pakistan Water and Power Development Authority for a period of ten years from 28th June, 1996; provided, however, that the exemption under this clause shall only be available subject to the business of the said taxpayer being restricted to owing and operating the Kot Addu power station. 5 Substituted for “(139) 5[(a) Any benefit, reimbursement received by an employee on account of medical charges or hospital charges, or both, incurred by an employee, as provided for under the terms of the employee’s employment agreement; or where such benefit for reimbursement, medical charges or hospital charges, or both are not provided for under the terms of employment’s agreement, medical allowance upto maximum of 10% of the basic pay for the year: Provided that National Tax Number of the hospital or clinic, as the case may be, is given and the employer also certifies and attests the medical or hospital bills to which this clause applies; or] (b) Any amount paid by a taxpayer, being an individual and resident in Pakistan, by way of personal expenditure on medical service, to the extent of 10% of taxable income returned in return of income or Rs 30,000 whichever is lower. Provided that the receipts in respect of such expenditure being name, National Tax Number and complete address of the 12 2nd Sch. P. I 259 The Income Tax Ordinance, 2001 charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment: Provided that National Tax Number of the hospital or clinic, as the case may be, is given and the employer also certifies and attests the medical or hospital bills to which this clause applies; (b) any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment; or (c) [1] medical practitioners are furnished along with his return of income.” By the Finance Act, 2003 1 Sub-clause (c) omitted by the Finacne Act, 2006, The omitted sub-clause (c) read as follows: (c) any amount paid during a year by a taxpayer, being a resident individual, by way of personal expenditure on medical service to the extent of ten per cent of taxable income declared in his return of income for the said tax year or thirty thousand rupees whichever is the less: Provided that the receipts of such expenditure bearing name, National Tax Number and complete address of the medical practitioners are furnished along with his return of income. 2nd Sch. P. I 260 The Income Tax Ordinance, 2001 2nd Sch. P. II 261 The Income Tax Ordinance, 2001 PART II REDUCTION IN TAX RATES Incomes or classes of income, or persons or classes of persons, enumerated below, shall be liable to tax at such rates which are less than the rates specified in the First Schedule, as are specified hereunder: 1[(1)] (2) Any income of persons whose profits or gains from business are computed under the Fifth Schedule to this Ordinance as is derived from letting out to other similar persons any pipeline for the purpose of carriage of petroleum shall be charged to tax at the same rate as is applicable to such persons in accordance with the provisions of the said Schedule. Ð (3) The tax in respect of income from 2[ ] services rendered 3[4] outside Pakistan shall be charged at the rate of one per cent of the gross receipts, provided that such receipts are brought into Pakistan in foreign exchange through normal banking channel. [Í(3A) The tax in respect of income from construction contracts out side Pakistan shall be charged at the rate of one per cent of the gross receipts provided that such income is brought into Pakistan in foreign exchange through normal banking channel.] 5 6 [(4)] 1 Omitted by the Finance Act, 2005. The omitted clause (1) read as follows: “(1) The rates of income tax A[ ], as specified in the First Schedule and as applicable to the profits and gains derived by a resident company from an undertaking setup between the First day of July, 1981 and the Thirtieth day of June, 1998, both days inclusive, and engaged in the exploration and extraction of such mineral deposits, other than petroleum, as B[is] specified by the Federal Government by a notification in the Official Gazette, shall be reduced by 50% for a period of five years immediately next following the period of five years from the date of commercial production.” A The words “and super tax” omitted by the Finance Act, 2003. B Substituted for the words “may be” by the Finance Act, 2003. Ð EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. FINAL TAX REGIME FOR INCOME FROM SERVICES RENDERED ABROAD. An amendment in clause (3) of Part II of Second Schedule has been made and the scope of the said clause has been extended. Now income from any type of services rendered abroad shall be subjected to a reduced tax rate of 1% of the gross receipts provided such receipts are brought into Pakistan through normal banking channels. 2 The words “engineering contracting” omitted by the Finance Act, 2005. 3 Inserted by the Finance Act, 2003 4 Words “or construction contracts” inserted by the Finance Act, 2007. 5 Clause (3A) inserted by the Finance Act, 2007. Í EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. TAXABILITY OF SERVCIES RENDERED/CONSTRUCTION CONTRACTS OUTSIDE PAKISTAN. [Second Schedule Part II, Clause (3A)] The gross receipts on account of or construction contracts executed outside Pakistan, (if brought into Pakistan in foreign exchange through normal banking channel) are chargeable to tax @ 1%. The provision has been amended to the effect that condition of bringing “gross receipts” has been substituted by bringing of “income” into Pakistan through banking channel. Accordingly, a new clause (3A) has been inserted in Part II of Second Schedule to the Income Tax Ordinance, 2001. 6 Omitted by the Finance Act, 2003. The omitted clause (4) read as follows: “(4) In the case of an industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of the Export Processing Zones Authority Ordinance, 1980 (IV of 1980), the income, profits and gains of such undertaking accruing or arising after the expiry of the period of exemption under clause (132) of Part I shall be charged to tax for a period of five years thereafter at the rate equal to twenty-five per cent of the rates specified in the First Schedule: Provided that nothing contained in this clause shall apply in respect of undertakings whose period of exemption under clause (124) of Part I will expire after the 30th June, 1997.” 2nd Sch. P. II (5) 262 The Income Tax Ordinance, 2001 [1] 2[(5A) The rate of tax to be deducted under sub-section (2) of section 152, in respect of payments *for profit on debt payable to a non-resident person having no permanent establishment in Pakistan, shall be 10% of the gross amount paid.] 3Î(5B) The tax in respect of capital gains derived by a person from the sale of shares or assets by a private limited company to Private Equity and Venture Capital Fund shall be charged at the rate of ten per cent of such gains.] 4[(6)] 5[(7)] 6[(8)] 7[(9) Ê Tax under section 148 shall be collected at rate of the 1% on import of all fibres, yarns and fabrics 1 Clause (5) omitted vide the Finance Act, 2009, the replaced clause read as follows: The tax chargeable in respect of commission received by an export indenting agent or an export buying house shall be at the rate equal to the rate of tax applicable to the exporter on export of goods to which such commission relates. 2 The following amendment issued vide the Finance Act, 2009 which may unable to incorporate in this clause: * (ii) in clause (5A), for the word “fro” the word “from” shall be substituted;” Clause (5A) substituted vide SRO 218(I)/2008 dated the 6th March, 2008, the old clause read as follows: (5A) The rate of withholding tax in respect of payments for profit on debt payable to a non-resident person, having no permanent establishment in Pakistan, shall be the rate as provided in Avoidance of Double Taxation Treaty of the respective country of the nonresident. 3 Clause (5A) and (5B) inserted by the Finance Act, 2007. Î EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. TAX ON CAPITAL GAINS OF PRIVATE COMPANIES IN RESPECT OF SHARES SOLD OF PRIVATE EQUITY AND VENTURE CAPITAL FUNDS: [Second Schedule Part II, Clause (5B)] A new clause (5B) has been added in Part II of Second Schedule to the Income Tax Ordinance, 2001 by virtue of which capital gains arising to a person from sale of shares or assets of private limited company to private equity and venture capital fund shall be taxed at a reduced rate of 10%. This provision will be applicable to those transactions which will be executed on or after 1st July 2007. 4 Clause (6) omitted by the Finance Act, 2008, the omitted clause read as follows: In the case of resident person the profit on Special US Dollar Bonds purchased out of any incremental deposits made in the existing foreign currency accounts on or after the 16th day of December, 1999, or out of new accounts opened on or after the said date, shall be liable to deduction of income tax under clause (c) of sub-section (1) of section 151 at the rate of 10 per cent of the amount of the said profit. 5 5 Omitted by the Finance Act, 2005. The omitted clause (7) read as follows: “(7) In case of any resident individual, the tax from profit or interest of any National A[Savings] Schemes of Directorate of National Savings or Post Office B[Savings] Account in which investment is made on, or after, the first day of July, 2001, shall be deducted at the rate of ten percent of such profit or interest: Provided that no tax shall be deducted from income or profits paid on(a) Defence Savings Certificates, Special Savings Certificates Savings Accounts or Post Office Savings Account, made on, or after, the first day of July, 2001, where such deposit does not exceed C[one hundred and fifty] thousand rupees; and (b) Investment in Monthly income Saving Accounts Scheme of Directorate of National Savings on, or after, the first day of July, 2001, where monthly installment in an account does not exceed one thousand rupees.” A Substituted for the word “Saving” by the Finance Act, 2003. B Substituted for the word “Saving” by the Finance Act, 2003. C Substituted for the word “three hundred” by the Finance Act, 2003. 6 Omitted by the Finance Act, 2005. The omitted clause (8) read as follows: “(8) In the case of Daewoo Corporation, Seoul, Korea (hereinafter referred to as the Contractor), payments received in full or in part (including a payment by way of an advance) in pursuance of the contract agreements made with the National Highway Authority on the thirtieth day of December, 1991, for design and construction of Lahore-Islamabad Motorway shall be deemed to be the income of the Contractor and charged to tax at the rate of three per cent of such payments which shall constitute final discharge of his tax liability under this Ordinance and the Contractor shall not be required to file the return of income under section 114.” 7 Substituted by the Finance Act, 2005. The substituted clause (9) read as follows: “(9) Tax shall be collected at 3/4th of the rate applicable under section 148 on the goods imported under the Afghan Transit 2nd Sch. P. II 263 The Income Tax Ordinance, 2001 [1] and goods covered by the Zero Rating Regime of the Sales Tax notified by Central Board of Revenue.] 2[(9A) Tax under section 148 shall be collected at the rate of 3% on the import value of raw material imported by an industrial undertaking for its own use.] 3[(9A)] [4] 5[(10)] 6[(11) (12)] 7[(13) [1] Trade Agreement, 1965, and subject to Notification S.R.O. 368(I)/95, dated the 2nd May, 1995.” Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. RATIONALIZATION OF WITHHOLDING TAX ON CERTAIN IMPORTS. As a measure of liberalization and support to the textile sector which exports a bulk of its production, a Scheme of readjustment of rate of Customs duty has been introduced. A total number of 152 tariff lines (items) have been identified for this purpose. The list includes fibers, yarns and fabrics (excluding pure cotton or its yarn or its fabric), leather and articles thereof, textile and articles thereof, carpets, sports good and surgical goods and raw material. On a similar analogy, clause (9) of Part II of the Second Schedule has been substituted to reduce withholding tax rate under section 148 to 1% in the case of import of the aforementioned goods with effect from July 1, 2005. A notification/SRO.638 (I)/2005 dated June 27, 2005 has been issued to identify the specific goods and materials for the purposes of 1% withholding tax under section 148. Goods on which withholding tax under section 148 shall be collected at the rate of 1% of the import value, please see SRO 638(I)/2005 dt. 27th June, 2005 at the ANNEXURE’S page no. 5 to 11. 1 Words “(excluding pure cotton or its yarn or its fabrics),” omitted by the Finance Act, 2008. 2 Clause (9A) inserted vide the Finance Act, 2009. 3 Clause (9A) inserted vide SRO 661(I)/2007 dated the 2nd July, 2007. 4 Clause (9A) omitted by the Finance Act, 2008, the omitted clause read as follows: Tax under section 231B shall be collected at the rate of two and a half per cent at the time of sale of motor car and the withholding tax agents (manufacturer or authorized dealer), irrespective of the date of booking or advance payment made by the purchaser, shall collect advance tax where sale invoice is issued and delivery of motor car is made after 31st August 2007. 5 Clause (10) omitted by the Finance Act, 2008, the omitted clause read as follows: In the case of M/s Fauji Foundation and Army Welfare Trust, so much of the income chargeable under the head "Income from business " as is not exempt under clause (58) of Part I, shall be charged to tax at the rate of 20% of such income. 6 Clauses (11) & (12) omitted by the Finance Act, 2006, the omitted clauses read as follows: (11) In the case of a non-resident O&M Contractor payments, received in full or in part including a payment by way of an advance, for the operation and maintenance of a private sector power project and transmission line projects approved by the Federal Government shall be deemed to be the income of the said O&M Contractor and charged to tax at the rate of five per cent of such payments for a period of three years beginning with the date of commencement of company's operations which shall constitute the final discharge of tax liability by the O&M Contractor under this Ordinance in respect of the said project. (12) In the case of consortium of M/s. STFA Construction Company of Turkey and M/s. JDN of Belgium (hereinafter referred to as the contractor) all payments received in pursuance of the contract agreement No. CEN-126/93, made with the Ormara Naval Harbour Project Board, on the fourteenth day of June, 1993, for the construction of a Naval Harbour at Ormara (including off-shore and land development works), chargeable to tax in any assessment year, shall be deemed to be the income of the contractor and charged to tax at the rate of three per cent which shall constitute final discharge of contractor's tax liability under this Ordinance. 7 Clause (13) substituted by the Finance Act, 2007, the old clause read as follows: 7[(13) Ê Tax under section 148 shall be collected in the case of edible oils at the rate of 3% and in the case of condemned ships imported for the purpose of breaking at the rate of 1% of the import value as increased by customs-duty and sales tax, if any, levied thereon.] 7 Substituted by the Finance Act, 2005. The substituted clause (13) read as follows: “A[(13) In respect of any edible oils and condemned ship imported for the purpose of breaking, the tax under section 148 shall be collected at the rate of three per cent of the value of such edible oils or ships as increased by customs-duty and sales tax, if any, levied thereon.]” A Substituted by S.R.O. 908(I)/2003, dated 15.09.2003. The substituted clause (13) read as follows: “(13) In respect of any edible oils imported, the tax under section 148 shall be collected at the rate of three per cent of the value of such edible oils as increased by the customs-duty and sales tax, if any, levied thereon.’ Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. WITHHOLDING TAX ON SHIPS IMPORTED FOR DISMANTLING. In the case of condemned ship imported for the purpose of breaking, withholding tax under section 148 was deductible @ 3% of the import value as increased by customs duty and sales tax. 2nd Sch. P. II 2[(13A) [3] 4[(13B) [5] 264 The Income Tax Ordinance, 2001 6[(13C) In respect of manufacturers of cooking oil or vegetable ghee or both, the rate of income tax on purchase of locally produced edible oil shall be 7[2]% of the purchase price.] 8[(13D)] 9[(13E) In respect of potassic fertilizers imported in pursuance of Economic Coordination Committee of the Cabinet’s decision No.ECC-155/12/2004 dated the 9th December, 2004, the tax under section 148 of the Income Tax Ordinance, 2001 shall be collected at the rate of one percent of its import value as increased by customs- duty and sales tax, if any, levied thereon.] 10[(13F)] Clause (13), of Part II of the Second Schedule has been amended to reduce the rate to 1%. The reduced rate will be applicable to those imports of condemned ships where L.Cs. have been opened on or after July 01, 2005. 1 Clause (13) omitted by the Finance Act, 2008 & also vide SRO 567(I)/2008 dated 11th June, 2008, the omitted clause read as below :Tax under section 148 shall be collected at the rate of 1% on imports of capital goods and raw material imported exclusively for its own use by a manufacturer registered with Sales Tax Department. 2 Substituted by SRO 619(I)/2004 dated the 17th July, 2004. Earlier this clause was inserted vide S.R.O. 441(I)/2004, dated 12.06.2004 and substituted by the Finance Act, 2004. The old clause read as under: “In respect of di-ammonium phosphate (DAP) fertilizer imported, the tax under section 148 shall be collected at the rate of 1% of its import value as increased by customs-duty and sales tax, if any, levied thereon” 3 Clause (13A) omitted by the Finance Act, 2008 & also vide SRO 567(I)/2008 dated 11th June, 2008, the omitted clause read as below :In respect of phosphatic fertilizers imported and specified in Notification No. S. R. O. 609 (I)/2004, dated 16th July, 2004 the tax under section 148 of the Income Tax Ordinance, 2001 shall be collected at the rate of 1% of its import value as increased by 3[customs-duty, 3 Substituted for “customs-duty and sales tax” by the Finance Act, 2007. sales tax and federal excise duty], if any, levied thereon.] 4 Inserted by the Finance Act, 2004. 5 Clause (13B) omitted by the Finance Act, 2008 & also vide SRO 567(I)/2008 dated 11th June, 2008, the omitted clause read as below In respect of goods falling under HS Code 801.1100, 801.3200, 802.1200, 802.9010, 902.4010, 902.4090, 5[2101.1110, 2101.1120, 0902.2000,] 904.1110, 907.0000, 908.1000, 3702.3100, 3705.2000, 3707.9000, 4011.2090, 5[ ] 6301.1000, 8204.0000, 8301.1000, 8511.1000, 8525.4000, 8529.9010 5[, ] 9004.1000 5[0904.1120 (White Pepper), 0904.1190 (Long Pepper), 0906.1000 (Cassia), 0813.4010 (Tamarind), 0908.3020 (Small Cardamom), 0908.3010 (Big Cardamom), 0909.1000 (Star Aniseeds), 0802.5000 (Pistachio), 1211.9000 (Medical Herbs), 1301.1010 (Seed Lac), 1903.0010 (Sago Seeds), 1301.9090 (Gum Gopal), 3706.9000 [Other (cinematographic film)], 9613.1000 (Pocket lighters, gas fuelled, non-refillable) and 9613.2000 (Pocket lighters, gas fuelled, refillable) and such other goods as notified by Central Board of Revenue] of the First Schedule to the Customs Act, 1969 (IV of 1969), imported, the tax under section 148 shall be collected at the rate of 2% of its import value as increased by 5[customs-duty, sales tax and federal excise duty], if any, levied thereon.] 5 Inserted vide SRO 1004(I)/2004 dated the 20th December, 2004. 5 The numbers and commas “50.04, 50.05, 50.06,” omitted by the Finance Act, 2005. 5 The word “and” substituted by the Finance Act, 2005. 5 Inserted by the Finance Act, 2005. 5 Substituted for “customs-duty and sales tax” by the Finance Act, 2007. 6 Substituted vide SRO 36(I)/2005 dated the 7th January, 2005. The old clause read as under ; *[(13C) In respect of edible oil purchased locally by manufacturers of cooking oil or vegetable ghee or both, the rate of income tax shall be 1% of the purchase price.] * {Inserted by the Finance Act, 2004.} 7 Substituted for “1” by the Finance Act, 2008 and also by SRO 567(I)/2008 dated the 11th June, 2008. 8 Omitted by the Finance Act, 2005. Earlier clause (13D) was inserted by S.R.O. 769(I)/2004, dated 06.09.2004. The omitted clause (13D) read as follows: “(13D) In respect of import of polyester yarn/fibre all types, the tax under section 148 shall be collected at the rate of two percent of the value of such items as increased by customs-duty and sales tax, if any, levied thereon.” 9 Inserted vide SRO 37(I)/2005 dated the 7th January, 2005. 10 Clause 13F omitted vide SRO 1037(I)/2005 dated the 14th October, 2005, the old clause read as follows; #[(13F) In respect of import of blankets (acrylic) *[ ], the tax under section 148 of the Income Tax Ordinance, 2001 shall be collected at the rate of two percent of the value of such items as increased by customs-duty and sales tax, if any, levied thereon.] # Inserted vide SRO 38(I)/2005 dated the 7th January, 2005. * The words and figures “and acrylic yarn of 32 to 40 metric count if imported for self consumption by blanket manufacturers” omitted by the Finance Act, 2005. 2nd Sch. P. II 265 The Income Tax Ordinance, 2001 1[Â (13G) 2[Tax under section 148 on the following items shall be collected @ 1% of their import value as increased by 3[customs-duty, sales tax and federal excise duty], if any levied thereon: 4[i ii. iii. ] iv. Gold; v. Mobile telephone sets; vi. Silver; Clause 13G inserted vide SRO 718(I)/2005 dated the 16th July, 2005. Â Income Tax Cir. No. 1 dated the 1st July, 2006 WITHHOLDING TAX ON EXEMPT AND REDUCED RATES IMPORTS . [Second Schedule, Part II, Clause (13G)] Under the previous regime, certain imports enjoyed total exemptions, whereas others are subject to a reduced rate of withholding tax. In the first category it includes imports of wheat, sugar, mobile telephone sets and plant, machinery, equipments and parts and in the second category are gold and silver which are subject to a withholding tax of Rs.2/- par tola and Rs.5/- per kg. respectively. Likewise import of re-rollable and re-meltable scrap which is a raw material for steel industry is liable to withholding tax @1% at the import stage. These concessions have now lost relevance and there was a need to rationalize the rate structure. i. The following items covered by SRO. 567(I)/2006 dated 05.06.2006 under the Customs Act, 1969 : (a) Disinfectants used in poultry business (b) pre-fabricated structures for poultry farms (c) live stock and raw materials and intermediaries goods as used in the manufacture of packing material for the packing of dairy products. (d) medicines for cancer, drugs used for kidney dialysis and kidney transplant, all type of vaccines for Hepatitis, Interferon and other medicines for Hepatitis, all vaccines/anti-sera, cardiac medicines, injection anti-D Immunoglobulin, blood bags CPDA.1, all medicines for HIV/AIDS and all medicines for Thalassemia. (e) News print ii. The following items covered by SRO. 575(I)/2006 dated 05.06.2006 under the Customs Act, 1969 : (a) medical, surgical, dental or veterinary machinery/ equipment, fixtures, fittings, furniture and diagnostic kits (not manufactured locally). 1 (b) equipments relating to call centers (not manufactured locally) (c) ripening chambers, hot water treatment plant, vapor hot treatment plant, modern cold storage, packing machinery, power generating sets of 10 – 25 KVA and battery operated fork lift trucks used in horticulture and floriculture business (d) processing and packing machinery/equipment required for fish farming (e) Broadcasting equipments 2 Clause (13G) substituted by the Finance Act, 2006. The old clause read as follows: (13G) In respect of re-meltable and re-rollable scrap, the tax under section 148 shall be collected at the rate of one per cent of the value of such goods as increased by customs-duty and sales tax, if any, levied thereon. 3 Substituted for “customs-duty and sales tax” by the Finance Act, 2007. 4 Sub-clauses (i) to (iii) omitted by the Finance Act, 2008 & also vide SRO 567(I)/2008 dated the 11th June, 2008, the omitted sub-clauses read as follows: i. Capital goods; ii. Cement; iii. Coal; 2nd Sch. P. II 266 The Income Tax Ordinance, 2001 vii – xxiv [1] 2[(13H) [3] Sub-clauses (vii) to (xxiv) omitted by the Finance Act, 2008 & also vide SRO 567(I)/2008 dated the 11th June, 2008, the omitted subclauses read as follows: vii. Sugar; viii. Wheat; ix. Raw wood; x. Trucks in CBU condition having Gross Vehicle Weight exceeding 5 tons classified under PCT headings 8704.3290 and 8704.9090; xi. Dump trucks classified underPCT heading 8704; Ô [xii. Fully dedicated CNG buses (CBU) classified under PCT heading 8702.1090 and 8702.9090 and agricultural tractors classified under PCT heading 8701.9020; ] xiii. medical, surgical, dental or veterinary machinery/equipment, fixtures, fittings, furniture and diagnostickits not manufactured locally covered by SRO 575(i)/ 2006 dated 05.06.2006 under the Customs Act, 1969; xiv. equipments relating to call centers not manufactured locally covered by SRO 575(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xv. Disinfectants used in poultry business covered by SRO 567(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xvi. pre-fabricated structures for poultry farms covered by SRO 567(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xvii. live stock and raw materials and intermediaries goods as used in the manufacture of packing material for the packing of dairy products covered by SRO 567(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xviii. ripening chambers, hot water treatment plant, vapor hot treatment plant, modern cold storage, packing machinery, power generating sets of 10–25 KVA and battery operated fork lift trucks used in horticulture and floriculture business covered by SRO 575(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xix. processing and packing machinery/equipment required for fish farming covered by SRO 575(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xx. medicines for cancer, drugs used for kidney dialysis and kidney transplant, all type of vaccines for Hepatitis, Interferon and other medicines for Hepatitis, all vaccines/anti-sera, cardiac medicines, injection anti-D Immunoglobulin, blood bags CPDA.1, all medicines for HIV/AIDS and all medicines for Thalassemia covered by SRO 567(i)/2006 dated 05-06-2006 under the Customs Act, 1969; xxi. Broadcasting equipments covered by SRO 575(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xxii. News print covered by SRO 567(i)/2006 dated 05.06.2006 under the Customs Act, 1969; xxiii. Computer hardware, parts and accessories of items classified under PCT heading 8471; “Explanation.—Capital goods mean any plant, machinery, equipment, spares and accessories, classified in Chapters 84, 85 or any other Chapter of the Pakistan Customs Tariff, required for,— (i) the manufacture or production of any goods, and includes refractory bricks and materials required for setting up a furnace, catalysts, machine tools, packaging machinery and equipment, refrigeration equipment, power generating sets and equipment, instruments for testing, research and development, quality control, pollution control and the like; (ii) use in mining, agriculture, fisheries, animal husbandry, floriculture, horticulture, live stock, dairy and poultry industry; (iii) service sector as defined in Customs Act, 1969; This clause shall supercede ²clause (iv) of SRO.593(I)/91 dated 30th June, 1991.] 1[xxiv Condemned ships for the purpose of breaking.] 1 Ô Sub-clause (xii) substituted vide SRO 1118(I)/2006 dated the 6th November, 2006, the old sub-clause read as follows: xii. Buses classified under PCT heading 87.01, 8702.1090; ² CLAUSE (IV) OF SRO.593(I)/91 DATED THE 30TH JUNE, 1991 READ AS FOLLOW: As substituted vide SRO 1203 dated the 25th November, 1991: (iv) persons who import plant, machinery, fixtures, fittings or any other equipment for purposes of setting up an industrial undertaking (including hotels) owned by such persons, or for installation in an existing industrial undertaking (including hotels) owned by them, and a certificate to that effect from the Commissioner of Income Tax, in respect of such plant, machinery, fixtures, fittings or equipment, is produced; 1 Sub clause xxiv inserted by the Finance Act, 2007. 2 Clause (13H) inserted by the Finance Act, 2006. 3 Clause (13H) omitted by the Finance Act, 2008 & also vide SRO 567(I)/2008 dated the 11th June, 2008, the omitted clause read as follows: Tax under section 148 on the following items shall be collected @ 2% of their import value as increased by customs duty 3[Federal Excise Duty] and sales tax, if any levied thereon: (i) raw material for steel industry including remeltable; and re-rollable scrap; 2nd Sch. P. II 267 The Income Tax Ordinance, 2001 1[(13HH) Tax shall be deducted under section 153 at the rate of 1% on the sale value of rice to be sold by Rice Exporters Association of Pakistan (REAP) to Utility Store Corporation, in accordance with the provisions of the agreement, signed with Ministry of Food, Agriculture and Livestock (MINFAL) on 2[April 30], 2008.] 3[(13HHH) Tax shall be deducted under section 153 at the rate of 0.75% on the sale value of rice to be sold by Rice Exporters Association of Pakistan (REAP) to Utility Store Corporation, in accordance with the provisions of the agreement, signed by REAP with Ministry of Food, Agriculture and Live Stock (MINFAL) on May 5, 2008: Provided that this clause shall applicable up to June 30, 2008.] (14) [4] (15) [5] (16) [6] (17) The rates of tax as specified in Division III of Part-I of First Schedule shall be reduced to 7.5% in case of dividends declared or distributed by purchaser of a power project privatized by WAPDA. 7[(18) In the case of a modaraba the rate of income tax shall be 25% of total income excluding such part of total income to which Division III of Part I of the First Schedule or section153 or section 154 applies.] 8[(19) In respect of tax year commencing on or after the first day of July, 2002, the rate of income tax in respect of income of amalgamated company for its different businesses shall be the same as applicable to such businesses in the relevant tax year for the tax year in which amalgamation takes place and two tax years next following.] (ii) raw material for manufacturer of poultry feed; [3] (iii) stationery]3[; (iv) edible oils including crude oil imported as raw material for manufacture of ghee or cooking oil (v) Energy saver lamps [PCT heading 8539.10]; (vi) Bitumen [PCT heading 2714]; (vii) Fixed Wireless Terminal [PCT heading 8525.2040]; (viii) Pesticides and wedicides.] 3 Words inserted by the Finance Act, 2007. 3 Word “and” omitted by the Finance Act, 2007. 3 Full stop substituted and new sub clauses (iv) to (viii) inserted by the Finance Act, 2007. 1 Clause (13HH) inserted by the Finance Act, 2008. 2 Substituted for “May 5” vide SRO 865(I)/2008 dated the 19th August, 2008. 3 Clause 13(HHH) inserted vide SRO 645(I)/2008 dated the 20th June, 2008. 4 Clause (14) omitted by the Finance Act, 2008, the omitted clause read as follows: Tax shall be deducted under section 154 at the rate of 0.75% from foreign exchange proceeds on account of exports of – (i) rice marketed under a brand name up to 4[fifty] kilograms packs; (ii) canned and bottled fish including sea-food and other food items; and (iii) precious and semi-precious stones whether uncut, cut, or polished. 5 Clause (15) omitted by the Finance Act, 2008, the omitted clause read as follows: Tax shall be deducted under section 154 at the rate of 0.75% from foreign exchange proceeds on account of exports of fish and fisheries products packed in retail packs of five hundred grams to two kilograms. 6 Clause (16) omitted by the Finance Act, 2008, the omitted clause read as follows: In the case of a non-resident company, rate of deduction of tax under section 150 on dividends received from a company engaged exclusively in mining operations, other than petroleum, shall be 7.5 per cent of the gross amount of dividend. 7 Added by the Finance Ordinance, 2002 8 Added by the Finance Ordinance, 2002. 2nd Sch. P. II 268 The Income Tax Ordinance, 2001 1[(20) The rates of tax as specified in clause (b) of Division-III of Part-I of First Schedule shall be reduced to 7.5% in case of dividend declared or distributed on shares of a company set up for power generation.] 2[(21) In the case of any resident person engaged in the business of shipping, a presumptive income tax shall be charged in the following manner, namely:- (a) ships and all floating crafts including tugs, dredgers, survey vessels and other specialized craft purchased or bare-boat chartered and flying Pakistan flag shall pay tonnage tax of an amount equivalent to one US $ per gross registered tonnage per annum; and (b) ships, vessels and all floating crafts including tugs, dredgers, survey vessels and other specialized craft not registered in Pakistan and hired under any charter other than bare-boat charter shall pay tonnage tax of an amount equivalent to fifteen US cents per tonne of gross registered tonnage per chartered voyage provided that such tax shall not exceed one US $ per tonne of gross registered tonnage per annum: Provided that the reduction under this clause shall not be available after the 30th June, 2020. Explanation.- For the purpose of this clause the expression “equivalent amount” means the rupee equivalent of a US dollar according to the exchange rate prevalent on the first day of December in the case of a company and the first day of September in other cases in the relevant assessment year.”] 3[(22)] 4[(23) In respect of Urea fertilizer imported, the tax under section 148 shall be collected at the rate of 1% of its import value as increased by 5[customs-duty, sales tax and federal excise duty], if any levied thereon.] 6[(24) In respect of pulses imported, the tax under section 148 shall be collected at the rate of two per cent of of the value of such pulses as increased by 7[customs-duty, sales tax and federal excise duty], if any, levied thereon.] 8[(24A) The rate of tax, under clause (a) of sub-section (1) of section 153, from distributors of cigarette and cigarette and pharmaceutical products 9[and for large distribution houses who fulfill all the conditions for a a large import house as laid down under clause (d) of sub-section (7) of section 148, for large import houses,] shall be 1% of the gross amount of payments.] 10[(25)] Added by the Finance Ordinance, 2002. Added by the Finance Ordinance, 2002. 3 Clause (22) omitted by the Finance Act, 2007, the omitted clause read as follow: 3[(22) In respect of companies getting enlisted on any stock exchange in Pakistan during the period first July, 2005 to thirtieth June, 2006, the rate of income tax shall be reduced by 1%.]3 Added by the Finance Act, 2005. 4 Added by the Finance Act, 2005. 5 Substituted for “customs-duty and sales tax” by the Finance Act, 2007. 6 Clause 24 inserted vide SRO 741(I)/2005 dated the 22nd July, 2005. 7 Substituted for “customs-duty and sales tax” by the Finance Act, 2007. 8 Clause (24A) inserted vide the Finance Act, 2009. 9 Words inserted vide the Finance Act, 2010 10 Clause (25) omitted by the Finance Act, 2007, the omitted clause read as follows: 10[(25) Services of 10[sizing, weaving,] stitching, dying, printing, embroidery and washing rendered or provided to an exporter or an export house shall be treated as export and chargeable to tax at the rate equal to the rate of tax applicable to the exporter on export of goods to which such services relate as specified in Division IV of Part III of the First Schedule.] 10 Clause 25 inserted vide SRO 946(I)/2005 dated the 12th September, 2005. 1 2 2nd Sch. P. II 269 The Income Tax Ordinance, 2001 1[(26) the rate of tax as specified in Division II of Part IV, of the First Schedule, in the case of advertising agents, shall be 5% of the amount of the payment.] 2[(27) It is clarified that the exporter to whom such services are rendered or provided would be responsible for the purposes of deduction of tax from the services falling in the ambit of the SRO 946(I)/2005. Clarification issued vide IT Cir. No. 7 dated the 14th November, 2005. 10 Words & comma inserted by the Finance Act, 2006. 1 Clause (26) added by the Finance Act, 2006. 2 Clause (27) and (28) omitted vide the Finance Act, 2009, the omitted clauses read as follows: 2[(27) The rate of tax to be paid under section 15 as specified under Division IV of Part I of First Schedule shall be as under:- (a) S.No. in the case of individual and association of persons at S.Nos.3 and 4 of the TableGross amount of rent (1) (3) (2) Rate of tax (3) Where the gross Rs.12,500 plus 7.5 amount of rent per cent of the gross exceeds Rs.400,000 amount exceeding but does not exceed Rs.400,000; Rs.1,000,000 (4) Where the gross Rs.57,500 plus 10 amount of rent exceeds per cent of the gross Rs.1,000,000 amount exceeding Rs.1,000,000; (b) S.No. (1) (2) in the case of company at S.Nos.2 and 3 of the TableGross amount of rent (2) Rate of tax (3) Where the gross Rs.20,000 plus 7.5 amount of rent per cent of the gross exceeds Rs.400,000 amount exceeding but does not exceed Rs.400,000; Rs.1,000,000 (3) Where the gross Rs.65,000 plus 10 amount of rent exceeds per cent of the gross Rs.1,000,000 amount exceeding Rs.1,000,000; (28) The rate of tax to be deducted under section 155, as specified in Division V, Part III of First Schedule, shall be as under:- (a) in the case of individual and association of persons at S.Nos.3 and 4 of the Table- S.No. (1) (3) Gross amount of rent (2) Rate of tax (3) Where the gross Rs.12,500 plus 7.5 amount of rent per cent of the gross exceeds Rs.400,000 amount exceeding but does not exceed Rs.400,000 Rs.1,000,000 2nd Sch. P. II 270 The Income Tax Ordinance, 2001 (28)] 1[(27)] (4) Where the gross Rs.57,500 plus 10 amount of rent exceeds per cent of the gross Rs.1,000,000 amount exceeding Rs.1,000,000; and (b) S.No. (1) (2) in the case of company at S.Nos.2 and 3 of the TableGross amount of rent (2) Rate of tax (3) Where the gross Rs.20,000 plus 7.5 amount of rent per cent of the gross exceeds Rs.400,000 amount exceeding but does not exceed Rs.400,000 Rs.1,000,000 (3) Where the gross Rs.65,000 plus 10 per amount of rent exceeds cent of the gross Rs.1,000,000 amount exceeding Rs.1,000,000.] Clause (27) omitted by the Finance Act, 2007, the omitted clause read as follows: 1[(27) The rate of withholding tax, as specified in Division III of Part III of the First Schedule, in respect of payment on account of transportation of goods through goods transport vehicles shall be two per cent of gross amount of the payment with effect from July 1, 2006.] 1 Clause (27) added vide SRO 794 (I)/2006 dated the 5th August, 2006. 1 2nd Sch. P. III 271 The Income Tax Ordinance, 2001 PART III REDUCTION IN TAX LIABILITY Income, or classes of income, or person or classes of person, enumerated below, shall be allowed reduction in tax liability to the extent and subject to such conditions as are specified hereunder:1[ 1] 2[(1)] 3[Any amount received as— (a) flying allowance by pilots, flight engineers, navigators of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority, Junior Commissioned Officers or other ranks of Pakistan Armed Forces; and (b) submarine allowance by the officers of the Pakistan Navy, shall be taxed @ 2.5% as a separate block of income.] ⊕4 ÂÊ [ (1A) Where the taxable income 5[other than income on which the deduction of tax is final], in a tax year, of a taxpayer aged 6[60] years or more on the first day of that tax year does not exceed 7[one million] rupees, his tax liability on such income shall be reduced by 50%. 1 Omitted by the Finance Act, 2005. The omitted sub-clause (1) read as follows: “(1) The Income Tax liability on income of salaried taxpayers, where any income chargeable under the head “salary” exceeds 50% of A[taxable] income as determined under clause 1 & 2 of Division-I of Part-I of the First Schedule, shall be reduced at the following rates:Income Slab Reduction in Tax liability S.No 1. ncome exceeds Rs.60,000 but does not exceed Rs.80,000 70% 2. ncome exceeds Rs 80,000 but does not exceed Rs.100,000 60% 3. ncome exceeds Rs.100,000 but does but exceed Rs.150,000 50% 4. ncome exceeds Rs. 150,000 but does but exceed Rs.200,000 40% 5. ncome exceeds Rs.200,000 but does not exceed rs,300,000 30% 6. ncome exceeds Rs.300,000 but does not exceed Rs.500,000 20% 7. ncome exceeds Rs.500,000 but does not exceed Rs.1,000,000 10% 8. ncome exceeds Rs.1,000,000 5%” A Substituted for the word “total” by the Finance Act, 2003. 2 Sub-clause (1) added by the Finance Act, 2006. 3 Clause substituted by the Finance Act, 2008, the replaced clause read as follows: Any amount received as flying allowance by— (a) pilots, flight engineers and navigators of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority; and (b) Junior Commissioned Officers or other ranks of Pakistan Armed Forces, shall be taxed @ 2.5% as a separate block of income. ⊕ This facility is also available in case a tax has already been paid at any stage by senior citizens who can claim the refund while filing their annual tax returns. For further guidance and facilitation, the taxpayers can visit FBR’s website or contact helpline staff on 051-111-227-227 and 0800-00227 during the working hours. REF. FBR Press Release dt. 23-4-2010 by Hamid Raza Wattoo PR. 4 Inserted by the Finance Ordinance, 2002. Â EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009SENIOR CITIZENS [Clause (1A) of Part III of the Second Schedule] The cost of living has increased. In view of this fact, the taxable limit, in a tax year, of a senior citizen having age of 60 years or more, has been enhanced from Rs. 500,000 to Rs. 750,000. Income Tax Cir. No. 1 dated the 1st July, 2006 TAX REBATE FOR SENIOR CITIZENS – REDUCTION IN AGE LIMIT FROM 65 TO 60 YEARS [Second Schedule, Part III, Clause (1A)] Tax liability is reduced by 50% in the case of a taxpayer whose: (i) age is 65 years or more; and (ii) income does not exceed Rs.400,000/In order to provide further relief to senior citizens, it has been extended to persons having age above 60 years. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. 2nd Sch. P. III 272 The Income Tax Ordinance, 2001 ÂÂ Ê 8[The tax payable by a full time teacher or a researcher, employed in a non profit education (2) or research institution duly recognized by Higher Education Commission, a Board of Education or a University recognized by the Higher Education Commission, including government training and research institution, shall be reduced by an amount equal to 75% of tax payable on his income from salary.] (2) The amount of tax payable, in a year in which the rupee is revalued or devalued, by a taxpayer whose profits or gains are computed in accordance with the rules contained in the Fifth Schedule to this Ordinance and who had entered with the Government into an agreement which provides for such reduction, shall be reduced to the amount that would be payable in the absence of the revaluation or devaluation of the rupee. (3) [9] ENHANCEMENT OF LIMIT TO Rs.400,000 FOR TAX REBATE TO SENIOR CITIZENS. A tax rebate of 50% was available to senior citizens above the age of 65 years, if their income did not exceed Rs.300,000. The limit of income for entitlement to the said rebate has been raised to Rs.400,000. It would be applicable for tax year *[2006] and onwards. * Substituted for “2005” vide IT Cir. No. 3 of 2005 dt. 11/7/05. 5 Words inserted vide the Finance Act, 2010 6 Figure substituted for “65” by the Finance Act, 2006. 7 Words “seven hundred fifty thousand “ substituted vide the Finance Act, 2010, earlier the figure “500,000” substituted vide the Finance Act, 2009, earlier the Figure “400,000” substituted by the Finance Act, 2008, before earlier it was substituted for “A[three] hundred thousand” substituted by the Finance Act, 2005. A Substituted for the word “two” by the Finance Act, 2004. ÂÂ Income Tax Cir. No. 1 dated the 1st July, 2006 REBATE FOR TEACHERS AND RESEARCHERS POSTED IN GOVERNMENT INSTITUTIONS [Second Schedule, Part III, Clause (2)] Full time teachers or researchers employed in non-profit education or research institutions including Government training and research institution duly recognized by a Board of Education, a University or Higher Education Commission enjoy a special tax rebate of 75%. Previously, the law provided that Government Training and Research Institutions are also required to be recognized from HEC for such reduction in tax liability. Whereas the ground reality is that Government Training and Research Institutions are invariably not subject to recognition by the HEC or by any University. In order to encourage teachers and researchers posted in such institutions, law has been suitably amended to extend similar tax reduction to them as well. Ê EXPLANATION VIDE IT CIR. NO. 1 OF 2005 DATED THE 5TH JULY, 2005. ENHANCEMENT OF TAX REBATE FOR TEACHERS AND RESEARCHERS. Full time teachers or researchers employed in non-profit education or research institutions including Government training and research institutions duly recognized by a Board of Education or Higher Education Commission enjoyed a special tax rebate of 50% of net tax otherwise payable. Clause (2) of Part III of the Second Schedule has been amended and the special rebate of 50% has been enhanced to 75% effective from the tax year *[2006]. * Substituted for “2005” vide IT Cir. No. 3 of 2005 dt. 11/7/05. 8 Sub-clause (2) substituted by the Finance Act, 2006. The old subclause read as follows: (2) In addition to the reduction specified in sub-clause (1), the tax payable by a full time teacher or a researcher, employed in a non profit education or research institution including government training and research institution duly recognized by a Board of Education or a University or the 8[Higher Education Commission], shall be further reduced by an amount equal to 8[75]% of the tax payable after the aforesaid reduction. 8 The words “University Grants Commission” substituted by the Finance Act, 2005. 8 The figure “50” substituted by the Finance Act, 2005. 9 Clause (3) omitted by the Finance Act, 2008, the omitted clause read as follows: Where any company engaged in the business of distribution of cigarette manufactured in Pakistan is required to pay minimum tax on the amount representing its turnover under section 113, the amount of tax payable under the said section shall be reduced by 9[eighty] per cent. 9 Substituted for the word “eight” by the Finance Ordinance, 2002. 2nd Sch. P. III 273 The Income Tax Ordinance, 2001 10(4) In respect of old and used automotive vehicles specified in Notification No. S.R.O. 932(I)/2004 dated the 20th November, 2004, the tax under section 148 of the Income Tax Ordinance, 2001, shall not exceed the amount specified in column (3) of the Table below, namely:- TABLE S.No. (1) 1. 2. 3. 4. 5. Vehicles meant for transport of persons (2) Upto 8000C from 801CC to 1000C from 1001CC to 1300CC from 1301CC to 1600CC from 1601CC to 1800CC Income tax in Pak Rupees. (3) Rs.29,852 Rs.34,497 Rs.67,282 Rs.105,061 Rs.120,256 11[(5) Where the corporatised entities of Pakistan Water and Power Development Authority (DISCOs) and National Transmission and Dispatch Company (NTDC), are required to pay minimum tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax up to the tax year 2013.] 12[13(6)] The tax payable under clause (c) of sub-section (1) of section 39, in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioners Benefit Account shall not exceed 10% of such profit.] 14[(7) Where any company engaged in the business of distribution of cigarettes manufactured in Pakistan is required to pay minimum tax on the amount representing its turnover under section 113, the amount of tax payable under the said section shall be reduced by eighty per cent.] Inserted vide SRO 981(I)/2004 dated the 10th December, 2004. Clause (5) inserted vide SRO 171(I)/2008 dated the 21st February, 2008 12 Clause (5) inserted by the Finance Act, 2008. 13Figure (clause) “5” renumbered as “6” vide the Finance Act, 2009. 14 Clause (7) added vide SRO 69(I)/2010 dated the 3rd February, 2010. 10 11 2nd Sch. P. III 274 The Income Tax Ordinance, 2001 2nd Sch. P. IV 275 The Income Tax Ordinance, 2001 PART IV EXEMPTION FROM SPECIFIC PROVISIONS Income, or classes of income, or persons or classes of persons, enumerated below, shall be exempt from the operation of such provisions of this Ordinance, subject to such conditions and to the extent, as are specified hereunder: 1[(1)] (2) In the case of losses referred to in section 57 in respect of an industrial undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of Export Processing Zones Authority Ordinance, 1980 (IV of 1980), the period of six 2[tax years] specified in the said section shall not apply. (3) The provisions of clause (b) of 3[component C of the formula contained in] sub-section (2) of section 61 shall not apply in case of donations made to Agha Khan Hospital and Medical College, Karachi: (3A) [4] 5[(4)] 6[(5) The provisions of section 111 regarding un-explained income or assets shall not apply in respect of,(i) any amount of foreign exchange deposited in a private Foreign Currency account held with an authorized bank in Pakistan in accordance with the Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan: Provided that the exemption clause shall not be available in respect of any incremental deposits made on or after the 16th day of December, 1999 in such accounts held by a resident person or in respect of any amount deposited in accounts opened on or after the said date by such person. (ii) any amount invested in the acquisition of Three Years Foreign Currency Bearer Certificates issued Omitted by the Finance Act, 2003. The omitted clause (1) read as follows: “(1) The provisions of clause (k) of section 21 shall not apply to any expenditure incurred by a banking company or a financial institution owned and controlled by the Federal Government on the provisions of perquisites, allowances or other benefits to any employee in pursuance of any law.” 2 Substituted for “assessment years” by the Finance Act, 2003 3 Substituted for “component C of” by the Finance Act, 2003 4 Clause (3A) inserted by the Finance Act, 2008, it was earlier i Inserted by the Finance Act, 2004 the omitted clause read as follows: The provisions of sub-sections (5) and (5A) of section 34 and section 70 shall not apply to any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department’s Circular No.29 of 2002, dated the 15th October, 2002, to the extent not set off against the losses under Part VIII of Chapter III. 5 Omitted by the Finance Act, 2003. The omitted clause (4) read as follows: “(4) The provisions of section 111 shall not apply in respect of any amount invested in the acquisition of Foreign Exchange Bearer Certificates issued under the Foreign Exchange Bearer Certificates Rule, 1985.” 6 Substituted by the Finance Act, 2005. The substituted clause (5) read as follows: “(5) The provisions of section 111 shall not apply in respect of any amount of foreign exchange deposited in a private Foreign Currency account held with an authorized bank in Pakistan in accordance with the Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan: Provided that the exemption under this clause shall not be available in respect of any incremental deposits made on or after the 16th day of December, 1999 in such accounts held by a resident person or in respect of 6[any amount] deposited in accounts opened on or after the said date by such person.” 1 2nd Sch. P. IV 276 The Income Tax Ordinance, 2001 under the Foreign Currency Bearer Certificates Rules, 1997. (iii) rupees withdrawn or assets created out of such withdrawal in rupees from private foreign currency accounts, or encashment of Foreign Exchange Bearer Certificates, US Dollar Bearer Certificates and Foreign Currency Bearer Certificates.] 1[(6)] 2[(7)] 3[(8)] 4[(9)] 5[(10) The provisions of section 111, Part-X and Part-XI of Chapter X shall not apply in respect of any amount invested in the purchase of Special US Dollar Bonds issued under the Special U.S. Dollar Bond Rules, 1998: Provided that the exemption under this clause shall not be available in respect of the amount invested in the said Bonds purchased out of incremental deposits made in the existing foreign currency accounts on or after 16th day of December, 1999, or out of foreign currency accounts opened on or after the said date, or on payment of the amount referred to in sub-rule (3) of rule 5 of Special U.S. Dollar Bond Rules, 1998 after the said date.] 6[(10A) (i) The provisions of serial No. 5 of the Table given in sub-section (1) of section 182 and clause (a) of sub-section (1) of section 205 shall not apply to business located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA, provided that the principal amount of tax due is paid by the 30th day of June, 2010; (ii) the provisions of section 235, regarding advance tax on electricity, shall not apply to commercial and industrial consumers of electricity located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA till the 30th day of June, 2011; Omitted by the Finance Act, 2003. The omitted clause (6) reas as follows: “(6) The provisions of section 111 shall not apply in respect of any amount invested in the acquisition of US Dollar Bearer Certificate issued under the US Dollar Bearer Certificates Rules, 1991.” 2 Omitted by the Finance Act, 2005. The omitted clause (7) read as follows: “(7) The provisions of section 111 shall not apply in respect of any amount invested in the acquisition of Three-Years Foreign Currency Bearer Certificates issued under the Foreign Currency Bearer certificates Rules, 1997.” 3 Omitted by the Finance Act, 2005. The omitted clause (7) read as follows: “(8) The A[provisions] of section 111 shall not apply in respect of rupees withdrawn or assets created out of such withdrawal in rupees from private foreign currency accounts, or encashment of Foreign Exchange Bearer Certificates, US Dollar Bearer Certificates and Foreign Currency Bearer Certificates.” A Substituted for the word “provision” by the Finance Act, 2003. 4 Omitted by the Finance Act, 2003. The omitted clause (9) read as follows: “(9) The provisions of section 111 shall not apply in respect of any amount invested by a sponsor or an original allottee in the purchase of shares of a company owning and managing an industrial undertaking specified in rule 5A of the Third Schedule of the Income Tax Ordinance, 1979.” 5 Substituted by the Finance Ordinance, 2002. The original clause (10) read as follows: “(10) The provisions of section 111 shall not apply in respect of any amount invested by a Foreign Currency Account holder in the purchase of Special US Dollar Bonds, issued under the Special US Dollar Bond Rules, 1998: Provided that the exemption under this clause shall not be available in respect of the amounts invested in the Bonds purchased out of Incremental deposits made in the existing foreign currency accounts on or after the 16th day of December, 1999 or out of the foreign currency accounts opened on or after the said date.” 6 Clause (10A) inserted vide the Finance Act, 2010. 1 2nd Sch. P. IV 277 The Income Tax Ordinance, 2001 (iii) the provisions of section 154, regarding withholding tax on exports, shall not be applicable to the export of goods originating from the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA, till the 30th day of June, 2011; Provided that this clause shall only be restricted to the exporters based in the above areas; (iv) the provisions of section 148 shall not be applicable on the import of plant and machinery for establishment of businesses in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA till the 30th day of June, 2011: Provided that this concession shall not be available to the manufacturers and suppliers of cement, sugar, beverages and cigarettes; Explanation.- For the purpose of this Schedule,(a) most affected areas means district Peshawar, Malakand Agency, and districts of Swat, Buner, Shangla, Upper Dir, Lower Dir, Hangu, Bannu, Tank, Kohat and Chitral; and (b) moderately affected areas means districts of Charsadda, Nowshera, D. I. Khan, Batagram, Lakki Marwat, Swabi and Mardan.] 1[(11A) The provisions of section 113, regarding minimum tax, shall not apply to,— (i) National Investment (Unit) Trust or a collective investment scheme authorized or registered under the Non-banking Finance Companies (Establishment and Regulation) Rules, 2003 or a real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006, or any other company in respect of turnover representing transactions in shares, or securities listed on a registered stock exchange; (ii) petroleum dealers, in so far as they relate to turnover on account of sale of petroleum and petroleum products, notwithstanding their status as a company, a registered firm or an individual, engaged in retail sale of petroleum and petroleum products through petrol pumps for the purposes of assessment of their income and determination of tax thereon: Provided that this exemption shall not apply to the sale of petroleum and petroleum products through petrol pumps which are directly operated or managed by companies engaged in distribution of petroleum and petroleum products. Explanation.— For the removal of doubt it is declared that the companies engaged in distribution of petroleum and petroleum products other than through petrol pumps shall not be entitled to the benefits of this exemption; 1 (iii) Hub Power Company Limited so far as they relate to its receipts on account of sale of electricity; (iv) Kot Addu Power Company Limited (KAPCO) for the period it continues to be entitled to exemption under clause (138) of Part-I of this Schedule; Clause (11A) inserted vide the Finance Act, 2009. 2nd Sch. P. IV 278 The Income Tax Ordinance, 2001 (v) companies, qualifying for exemption under clause (132) of Part-I of this Schedule, in respect of receipts from sale of electricity; (vi) Provincial Governments and Local Government, qualifying for exemption under section 49 and other Government bodies which are otherwise exempt from income tax: Provided that nothing shall be construed to authorize any refund of tax already paid or the collection of any outstanding demand created under the said section; (vii) Pakistan Red Crescent Society; (viii) special purpose, non-profit companies engaged in scrutinizing the receivables of Provincial Governments; (ix) non-profit organizations approved under clause (36) of section 2 or clause (58) or included in clause (61) of Part-I of this Schedule; (x) a taxpayer who qualifies for exemption under clause (133) of Part-I of this Schedule, in respect of income from export of computer software or IT services or IT enabled services; (xi) a resident person engaged in the business of shipping who qualifies for application of reduced rate of tax on tonnage basis as final tax under clause (21) of Part II of the Second Schedule; (xii) a venture capital company, venture capital fund and Private Equity and Venture Capital Fund which is exempt under clause (101) of Part-I of this Schedule; (xiii) a Modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980); (xiv) Corporate and Industrial Restructuring Corporation (CIRC); (xv) The corporatized entities of Pakistan Water and Power Development Authority, so far as they relate to their receipts on account of sales of electricity, from the date of their creation upto the date of completion of the process of corporatization i.e. till the tariff is notified; (xvi) a morabaha bank or a financial institution approved by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan (SECP), as the case may be, for the purpose of Islamic Banking and Finance in respect of turnover under a morabaha arrangement; and (xvii) WAPDA First Sukuk Company Limited.] 1[(11)] [2] 1 Substituted by the Finance Act, 2005. The substituted clause (11) read as follows: “(11) The provisions of section 113 shall not apply to National Investment (Unit) Trust or a Mutual Fund established by the Investment Corporation of Pakistan or an investment company registered under the Investment Companies and Investment Advisors Rules, 1971 or any other company in respect of turnover representing transactions in shares, or securities listed on a registered stock exchange.” 2 Clause (11) omitted by the Finance Act, 2008, the omitted clause read as follows: Â (11) The provisions of section 113, regarding minimum tax, shall not apply to,- 2nd Sch. P. IV 279 The Income Tax Ordinance, 2001 (i) National Investment (Unit) Trust or a collective investment scheme authorized or registered under the Non-banking Finance Companies (Establishment and Regulation) Rule, 2003 2[or a real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006], or any other company in respect of turnover representing transactions in shares, or securities listed on a registered stock exchange; (ii) petroleum dealers, in so far as they relate to turnover on account of sale of petroleum and petroleum products, notwithstanding their status as a company, a registered firm or an individual, engaged in retail sale of petroleum and petroleum products through petrol pumps for the purposes of assessment of their income and determination of tax thereon: Provided that this exemption shall not apply to the sale of petroleum and petroleum products through petrol pumps which are directly operated or managed by companies engaged in distribution of petroleum and petroleum products. Explanation.- For the removal of doubt it is declared that the companies engaged in distribution of petroleum and petroleum products other than through petrol pumps shall not be entitled to the benefits of this exemption; (iii) Hub Power Company Limited so far as they relate to its receipts on account of sale of electricity; (iv) Kot Addu Power Company Limited (KAPCO) for the period it continues to be entitled to exemption under clause (138) of PartI of this Schedule; (v) companies, qualifying for exemption under clause (132) of Part-I of this Schedule, in respect of receipts from sale of electricity; (vi) Provincial Governments and local authorities, qualifying for exemption under section 49 and other Government or semiGovernment bodies which are otherwise exempt from income tax: Provided that nothing shall be construed to authorize any refund of tax already paid or the collection of any outstanding demand created under the said section; (vii) Pakistan Red Crescent Society; (viii) special purpose, non-profit companies engaged in scrutinizing the receivables of Provincial Governments or the companies; (ix) non-profit organizations approved under clause (36) of section 2 or clause (58) or included in clause (61) of Part-I of this Schedule; (x) a taxpayer who qualifies for exemption under clause (133) of Part-I of this Schedule, in respect of income from export of computer software or IT services or IT enabled services; (xi) a resident person engaged in the business of shipping who qualifies for application of reduced rate of tax on tonnage basis as final tax under clause (21) of Part II of the Second Schedule; (xii) a venture capital company[,]2 venture capital fund 2[and Private Equity and Venture Capital Fund] which is exempt under clause (101) of Part-I of this Schedule; (xiii) a Modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980); (xiv) Corporate and Industrial Restructuring Corporation (CIRC); (xv) a Small Company as defined in section 2; 2[ ] (xvi) The corporatized entities of Pakistan Water and Power Development Authority, so far as they relate to their receipts on account of sales of electricity, from the date of their creation upto the date of completion of the process of corporatization i.e. till the tariff is notified]Q[;] 2[a morabaha bank or a financial institution approved by the State Bank of Pakistan or the Securities and Exchange (xvii) Commission of Pakistan (SECP), as the case may be, for the purpose of Islamic Banking and Finance in respect of turnover under a morabaha arrangement] [; and (xviii) WAPDA First Sukuk Company Limited.] Â Income Tax Cir. No. 1 dated the 1st July, 2006 MURABAHA FINANCING. [Second Schedule, Part IV, Clause (11)] Islamic banking is fast coming up in Pakistan. In conventional banking, minimum tax i.e. 0.5% is applicable on the interest income only as this falls under the definition of ‘turnover’. Whereas in case of Murabaha, the applicability of minimum tax i.e. 0.5% is on total amount of resale (cost plus profit) as the Islamic bank will be recording the sales revenue in their books which will be treated as their turnover. In order to ensure that Islamic banking is not at a disadvantage viz-a-viz normal banking, minimum tax @ 0.5% on Murabaha turnover covered under the Islamic Banking Transactions has been withdrawn w.e.f. Tax Year 2007. 2 Words & comma inserted by the Finance Act, 2006. 2 Comma substituted for “and” by the Finance Act, 2007. 2 Words inserted by the Finance Act, 2007. 2 Word “and” omitted by the Finance Act, 2006. Q Substituted for “; and” vide SRO 884(I)/2006 dated 28th August, 2006. 2 Sub-clause (xvii) inserted by the Finance Act, 2006. Substituted for full stop and subclause (xviii) added vide SRO 884(I)/2006 dated 28th August, 2006. 2nd Sch. P. IV 280 The Income Tax Ordinance, 2001 1[(12)] 2[(13)] 3[(13A)] 4[(14)] 5[(15)] (16) The provisions of sections 6[113,] [7] 148, 151, 153, 155 8[and 156] shall not apply to the institutions of the Agha Khan Development Network (Pakistan) listed in Schedule 1 of the Accord and Protocol dated November 13, 1994, executed between the Government of the Islamic Republic of Pakistan and Agha Khan Development Network: Provided that such institutions shall continue to collect and deduct tax under section 9[149, 151, 152, 153, 155, 156 or 233] from others persons, wherever required thereunder 10[. 11[(16A) The provisions of section 153(1)(b) shall not be applicable to the news print media services in respect of the advertising services.] 1 Omitted by the Finance Act, 2005. The omitted clause (12) read as follows: “(12) The provisions of section 113, in so far as they relate to turnover on account of sale of petroleum and petroleum products shall not apply to petroleum dealers, notwithstanding A[their] status as a company, a registered firm or an individual, engaged in retail sale of petroleum and petroleum products through petrol pumps for the purposes of assessment of their income and determination of tax thereon: Provided that this exemption shall not apply to the sale of petroleum and petroleum products through petrol pumps which are directly operated or managed by companies B[ ] engaged in distribution of petroleum and petroleum products. Explanation. For the removal of doubt it is declared that the companies engaged in distribution of petroleum and petroleum products other than through petrol pumps shall not be entitled to the benefits of this exemption.” A Substituted for the word “there” by the Finance Act, 2003. B The words “and registered firms” omitted by the Finance Act, 2003. 2 Omitted by the Finance Act, 2005. The omitted clause (13) read as follows: “(13) The provisions of section 113 shall not apply to Hub Power Company Limited so far as they relate to its receipts on account of sale of electricity.” 3 Omitted by the Finance Act, 2005. The omitted clause (13A) read as follows: “A[(13A) The provisions of section 113 shall not apply to Kot Addu Power Company Limited (KAPCO) for the period it continues to be entitled to exemption under clause (138) of Part-I of this Schedule.]” A Inserted by S.R.O. 724(I)/2002, dated 17.10.2002. 4 Clause (14) omitted by the Finance Act, 2006. The omitted clause read as follows: (14) A company registered and authorized by the Federal Government to import gold and silver shall be liable to pay tax on import of gold at the rate of two rupees per eleven grams six hundred and sixty-four milligrams and five rupees per kilogram in the case of silver in accordance with the provisions of section 148 and such payment of tax shall be deemed to be full and final liability of tax in respect of income accruing from such import including liability of tax under section 113. 5 Omitted by the Finance Act, 2005. The omitted clause (15) read as follows: “(15) The provisions of section 113 shall not apply to companies, qualifying for exemption under clause (132) of Part-I of this Schedule, in respect of receipts from sale of electricity.” 6 Inserted vide the Finance Act, 2009. 7 Figure 113, omitted by the Finance Act, 2008. 8 Substituted for “, 156 and 157” by the Finance Act, 2003 9 Substituted for “113” by the Finance Act, 2003 10 Full stop substituted for colon, and proviso omitted by the Finance Act, 2008, the omitted proviso read as follows: Provided further that in respect of application of section 10[113], this clause shall take effect from the first day of July, 1991 11 EXPLANATION ISSUED VIDE CIRCULAR No. 3 DATED THE 17TH JULY, 2009EXEMPTIONS FROM PROVISIONS OF SECTION 153(1)(b) [Clause (16A) of Part IV of the Second Schedule] Through the insertion of new clause 116A in Part IV of Second Schedule, section 153(1)(b) will not be applicable to news print media. However, for media other than print media, provisions of section 153(1)(b) shall continue to apply. Clause (16A) inserted vide the Finance Act, 2009. 2nd Sch. P. IV 281 The Income Tax Ordinance, 2001 1[(17)] 2[(18)] (19) The provisions of 3[sections 113 and] 151 shall not apply to non residents, (excluding local branches or subsidiaries or offices of foreign banks, companies, associations of persons or any other person operating in Pakistan), in respect of their receipts from Pak rupees denominated Government and corporate securities and redeemable capital, as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on a registered stock exchange, where the investments are made exclusively from foreign exchange remitted into Pakistan through a Special Convertible Rupee Account maintained with a bank in Pakistan. 4[ ] 5[ ] 6[ ] 7[ ] 8[ ] 9[ ] 1 Omitted by the Finance Act, 2005. The omitted clause (17) read as follows: “(17) The provisions of section 113, shall not apply to A[Provincial Governments and] local authorities, qualifying for exemption under section 49 and other B[ ] C[Government or semi-Government bodies which are otherwise exempt from income tax]: Provided that nothing contained in this clause shall be construe to authorize any refund of tax already paid or the collection of any outstanding demand created under the said section.” A Inserted by the Finance Act, 2003. B The word “than” omitted by the Finance Act, 2004. C Substituted for the words and commas “corporate, Government or semi-Government bodies, not otherwise liable to income tax” by the Finance Act, 2003. 2 Omitted by the Finance Act, 2005. The omitted clause (18) read as follows: “(18) The provisions of section 113 shall not apply to Pakistan Red Crescent Society.” 3 Substituted for “section” vide the Finance Act, 2009, earlier it was substituted for “sections 113 and” by the Finance Act, 2008. 4 Omitted by the Finance Act, 2005. The omitted clause (20) read as follows: “(20) The provisions of section 113 shall not apply to special purpose, non-profit companies engaged in securitizing the receivables of Provincial Governments or the companies.” 5 Omitted by the Finance Act, 2005. The omitted clause (21) read as follows: “(21) The provisions of section 113 shall not apply to non-profit organisations A[approved under clause (36) of section 2 or clause (58) or included in] clause (61) of Part-I of this Schedule.” A Substituted for the words, brackets and figures “including those approved or included in clause (58) or” by the Finance Act, 2003. 6 Omitted by the Finance Act, 2005. The omitted clause (22) read as follows: “(22) The provisions of section 113 shall not apply to a taxpayer who qualifies for exemption under clause (133) of Part-I of this Schedule.” 7 Omitted by the Finance Act, 2005. The omitted clause (22A) read as follows: “A(22A) The provisions of section 113 shall not apply to a resident person engaged in the business of shipping who qualifies for application of reduced rate of tax on tonnage basis as final tax under clause (21) of Part II of the Schedule.” A Inserted vide S.R.O. 248(I)/2003, dated 05.03.2003. 8 Omitted by the Finance Act, 2005. The omitted clause (23) read as follows: “(23) The provisions of section 113 shall not apply to a venture capital company and venture capital fund which is exempt under clause (101) of Part-I of this Schedule.” 9 Omitted by the Finance Act, 2005. The omitted clause (24) read as follows: “(24) The provisions of section 113 shall not apply to a modaraba registered under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980).” 2nd Sch. P. IV 1[ ] 2[ ] 3[ ] 4[ ] 5[ ] 6[ ] 7[ ] 1[ ] 282 The Income Tax Ordinance, 2001 1 Omitted by the Finance Act, 2005. The omitted clause (25) read as follows: “(25) Nothing in section 113 shall apply to Corporate and Industrial Restructuring Corporation (CIRC).” 2 Omitted by the Finance Act, 2005. The omitted clause (26) read as follows: “(26) The provisions of section 148 shall not apply to goods or classes of goods imported by contractors and sub-contractors engaged in the execution of power project under the agreement between the Islamic Republic of Pakistan and Hub Power Company Limited.” 3 Omitted by the Finance Act, 2005. The omitted clause (27) read as follows: “(27) The provisions of section 148 shall not apply to such specially equipped motor vehicle or support equipment imported by a disabled person, as is allowed by the Federal Government.” 4 Omitted by the Finance Act, 2005. The omitted clause (28) read as follows: “(28) The provision of section 148 shall not apply to in case of such goods imported into Pakistan as are exempt from customs duties and sales tax under A[Headings 9913, 9914 and 9915 of Sub-Chapter III of Chapter 99 of First Schedule the Customs Act, 1969 (IV of 1969)].” A Substituted for the words, comma, brackets and figures “S.R.O’s 360(I)/2000, 362(I)/2000 and 363(I)/2000 dated 17.06.2002” by the Finance Act, 2003. 5 Omitted by the Finance Act, 2005. The omitted clause (29) read as follows: “A(29) The provisions of section 148 shall not apply to goods imported by direct and indirect exporters covered under --(a) Sub-Chapter 4 of Chapter XII of S.R.O. 450(I)/2001 dated 18.06.2001; (b) Sub-Chapter 6 of Chapter XII of S.R.O. 450(I)/2001 dated 18.06.2001; and (c) Sub-Chapter 7 of Chapter XII of S.R.O. 450(I)/2001 dated 18.06.2001;” A Earlier clause (29) was substituted by the Finance Act, 2003. The said substituted clause read as follows: “(29) The provisions of section 148 shall not apply to goods imported by direct and indirect exporters covered under:(i) the Manufacturing in Bond Rules, 1997, issued under Notification No. S.R.O. 1140(I)/97, dated the 6th November, 1997; (ii) the Common Bonded Warehouse (Conventional) Rules, 1998 issued under Notification No. S.R.O. 843(I)/98, dated the 23rd July, 1998; and (iii) the Duty and Tax Remission for Export Rules, 2001, issued under Notification No. S.R.O. 185(I)/2001, dated the 21st March 2001.” 6 Omitted by the Finance Act, 2005. The omitted clause (30) read as follows: “A[(30) The provisions of section 148 shall not apply in respect of goods specified under Heading 9929, Sub-Chapter VIII of Chapter 99 of the First Schedule to the Customs Act, 1969 (IV of 1969);]” A Substituted by the Finance Act, 2003. The substituted clause (30) read as follows: B[“(30) The provisions of section 148 shall not apply in respect of goods temporarily imported into Pakistan for subsequent exportation and which are exempt from customs-duty under Notification No.S.R.O.410(I)/2001, dated the 18th June, 2001, and the goods specified at S.Nos.22 and 23 in Table-II of the Notification No.S.R.O.444(I)/2001, dated the 18th June, 2001.]” B Earlier this was Substituted by the Finance Ordinance, 2002. The substituted clause (30) read as follows: “(30) The provisions of section 148 shall not apply in respect of goods temporarily imported into Pakistan for subsequent exportation and which are exempt from Notification No .S.R.O. 410(I)/2001 dated 18th June, 2001 and Notification No. S.R.O. 592(I)/97, dated 7th August, 1997.” 7 Omitted by the Finance Act, 2005. The omitted clause (31) read as follows: “(31) The provisions of section 148 shall not apply in respect of such mobile telephone sets as are exempt from custom duty and are charged to sales tax in the manner prescribe in the Notification No. S.R.O 390(I)/2001 dated 18th June, 2001.” 2nd Sch. P. IV 2[ ] 3[ ] 283 The Income Tax Ordinance, 2001 (33) [4] 5[(34)] 6[(35)] (36) The provisions of clause (c) of sub-section (1) of section 151 shall not apply in respect of any amount paid as interest or profit on Special US Dollar Bonds issued under the Special US Dollar Bonds Rules, 1998. 7[(36A)] 1[(37)] 1 Omitted by the Finance Act, 2005. The omitted clause (31A) read as follows: “A[(31A) The provisions of section 148 shall not apply to plant, machinery and equipment imported as are subject to 5% rate of customsduty under Chapter 84 of the First Schedule to the Customs Act, 1969 (IV of 1969), or are exempt from customs-duty or subject to a lower rate of customs-duty under relevant Customs notifications.]” A Inserted by the Finance Act, 2004. Earlier this clause was inserted by S.R.O. 441(I)/2004, dated 12.06.2004. 2 Omitted by the Finance Act, 2005. The omitted clause (31B) read as follows: “A[(31B) The provisions of section 148 shall not apply in respect of agricultural tractors imported in CBU condition.]” A Inserted by the Finance Act, 2004. 3 Omitted by the Finance Act, 2003. The omitted clause (32) read as follows: “(32) The provisions of sections 149 and 152 relating to fee for technical services shall not apply to M/s Siddiq Sons Tin Plate Limited in respect of salaries of expatriate employees, royalty or technological and know-how fee for technical assistance for projects located in Special Industrial Zone, Windher, Balochistan, who have established L/Cs prior to the 31st January, 1996.” 4 Clause (33) omitted by the Finance Act, 2008, the omitted clause read as follows: The provisions of sections 151 and 233 shall not apply to any person making payment to National Investment (Unit) Trust or a mutual fund established by the Investment Corporation of Pakistan or an investment company registered under the Investment Companies and Investment Advisers Rules 1971 or a unit trust scheme constituted by an Asset Management Company registered under the Asset Management Companies Rules, 1995 4[or a real investment trust, approved and authorized under the Real Estate Investment Trust Rules, 2006, established and managed by a REIT management company licensed under the Real Estate Investment Trust Rules, 2006 4[or a Private Equity and Venture Capital Fund].] Words , commas and figures inserted by the Finance Act, 2006. Words inserted by the Finance Act, 2007. 5 Omitted by the Finance Act, 2005. The omitted clause (34) read as follows: “(34) The provision of section 151 shall not apply in respect of profit or interest paid on a Term Finance Certificate held by a company which has been issued on, or after, the first day of July, 1999.” 6 Omitted by the Finance Act, 2005. The omitted clause (35) read as follows: “(35) The provisions of section 151 shall not apply to any payment made by way profit or interest to any person on Term Finance Certificates being the instruments of redeemable capital under the Companies Ordinance, 1984 (XLVII of 1984), issued by Prime Minister’s Housing Development Company (Pvt) Limited (PHDCL).” 7 Clause (36) omitted by the Finance Act, 2008, earlier it was inserted by the Finance Act, 2004. EXPLATION ISSUED VIDE CIRCULAR No. 5 DATED THE 5TH JULY, 2008CAPPING OF MAXIMUM TAX RATE AT 10% FOR PROFIT ON PENSIONER’S BENEFIT SCHEME AND BEHBOOD FUND. Under clause (36A) of Part IV of the 2nd Schedule to the Ordinance, no tax is deducted from profit paid on investment in Pensioner’s Benefit Scheme and Behbood Fund. However, the income earned therefrom is chargeable to tax at normal rates which may go upto 20% of the profit. Profit on debt on investment schemes of CDNS as well as bank deposits is subject to withholding tax @ 10% as final tax. This anomalous position for pensioners and senior citizens could not be the intention of the legislature, which existed, due to ambiguity in the law. In order to provide relief to pensioners and senior citizens, a new clause (5) has been inserted in Part III of the 2nd Schedule to the Ordinance, by virtue of which profit earned under both the schemes would be taxed at normal rates as a separate block of income but maximum tax rate, in any case, shall not exceed 10% of the profit. The omitted clause read as follows: The provisions of clause (a) of sub-section (1) of section 151 shall not apply in respect of any amount paid as yield or profit on investment in Bahbood Savings Certificate or Pensioner’s Benefit Account.] 4 4 2nd Sch. P. IV 284 The Income Tax Ordinance, 2001 (38) The provisions of section 151, 2[153 and 233] shall not apply to special purpose vehicle for the purpose of securitization. 3[(38A) The provisions of sections 150, 151 and 233 shall not apply to a Venture Capital Company;] 4[(38B) The provisions of section 150 shall not apply to the Islamic Development Bank.] 5[(39)] 6[(40)] (41) The provisions of 7[sub-section 8[(1B) of section 152]] shall not apply in respect of a non-resident person unless he opts for the presumptive tax regime: Provided that a declaration of option is furnished in writing within three months of the commencement of the 9[tax] year and such declaration shall be irrevocable and shall remain in force for three years. 10[(41A)] 11[Í(41B) The provisions of sub-section (2) of section 152 shall not apply in respect of payments to foreign news agencies, syndicate services and non-resident contributors, who have no permanent establishment in Pakistan.] 1 Omitted by the Finance Act, 2005. The omitted clause (37) read as follows: “(37) The provisions of section 151 shall not apply to Pak rupee accounts or certificates referred to in clause (83) of Part I of this Schedule.” 2 Inserted by the Finance Ordinance, 2002. 3 Inserted by the Finance Act, 2004. 4 Inserted by the Finance Act, 2004. 5 Omitted by the Finance Act,2003. The omitted clause (39) read as follows: “(39) The provisions of section 151 shall not apply to a person who produces a certificate from the Commissioner of Income Tax concerned to the effect that his income during the income year is exempt from tax.” 6 Omitted by the Finance Act, 2005 but, notwithstanding any judgement, order or decision of any Court, Tribunal or Authority including Income Tax Authority, shall be deemed always to have been so omitted and shall have effect accordingly. The omitted clause (40) read as follows: “(40) The provisions of A[sub-section (6) of section 153] in so far as they relate to payments on account of supply of goods B[from] which tax is deductible under the said section shall not apply in respect of any person being a manufacturer of such goods, unless he opts for the presumptive tax regime: Provided that a declaration of option is furnished in writing within three months of the commencement of the C[tax] year and such declaration shall be irrevocable and shall remain in force for three years: Provided further nothing contained in this clause shall apply to any manufacturer of goods for which special rates of deduction of tax are specified under the D[repealed] Ordinance.” A Substituted for the word and figure “section 153” by the Finance Ordinance, 2002. B Inserted by the Finance Act, 2003. C Substituted for the word “income” by the Finance Act, 2003. D Substituted for the word “replaced” by the Finance Act, 2003. 7 Substituted for the word and figure “section 153” by the Finance Ordinance, 2002. 8 Substituted for “(7) of section 153” by the Finance Act, 2006. 9 Substituted for “income” by the Finance Act, 2003 10 Clause (41A) omitted by the Finance Act, 2008, it was earlier inserted vide SRO 1130(I)/2005 dated the 14th November, 2005. The omitted clause read as follows: Notwithstanding anything contained in the Finance Act, 2005 (VII of 2005), with respect to the omission of clause (40) of Part IV of the Second Schedule to this Ordinance, nothing in sub-section (6A) of Section 153 of this Ordinance shall apply to any person being a manufacturer, where declaration of option for the presumptive tax regime has been furnished and transactions pertaining to such option have been undertaken and completed on or before the 30th June, 2005: Provided that all declaration of options already furnished shall cease to have effect after the 30th June, 2005.] 11 Clause (41B) inserted by the Finance Act, 2007. 2nd Sch. P. IV 285 The Income Tax Ordinance, 2001 (42) The provisions of 1[sub-section (6) of section 153] shall not apply in respect of payments received by a resident person for providing services by way of operation of container or chemical or oil terminal at a sea-port in Pakistan or of an infrastructure project covered by the Government’s Investment Policy, 1997. 2[(42A)] 3[(43)] 4[→(43A) The provisions of sub-section (1) of section 153 shall not apply to payments received by a person 5[ ] on account of supply of petroleum product imported by the same person under the Government of Pakistan's de-regulation policy of POL products;] 6[(43B) The provisions of clause (a) sub-section (1) of section 153 shall not apply to payments received on sale of air tickets by traveling agents, who have paid withholding tax on their commission income.] [7] Í EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. WITHHOLDING TAX ON REMITTANCES/PAYMENTS TO FOREIGN NEWS AGENCIES, SYNDICATE SERVICES AND NONRESIDENT CONTRIBUTORS. [Second Schedule Part IV, Clause (41B)] A new clause (41B) has been inserted in Part IV of Second Schedule to the Income Tax Ordinance, 2001 to exempt payments/remittances made to non-resident from withholding tax under section 152(2), in respect of – (i) news agencies; (ii) syndicate services; and (iii) individual contributors/writers; who do not have Permanent Establishment in Pakistan. 1 Substituted for the word and figure “section 153” by the Finance Ordinance, 2002 2 Clause (42A) omitted by the Finance Act, 2008, it was earlier inserted vide SRO 1205(I)/2005 dated the 6th December, 2005. The omitted clause read as follows: The provisions of sub-section (6) of section 153 shall not apply in respect of payments received by a person for supply of relief goods for earthquake victims against funds from the President Relief Fund for Earthquake Victims, 2005, or any other such source of the Government or the purchases made by approved voluntary Non-Profit Organizations or welfare bodies for the aforesaid purpose. 3 Omitted by the Finance Act, 2004. The omitted clause (43) read as follows: “(43) The provisions of 9A[sub-section (1) of section 153] shall not apply to payments received by Pak-Arab Refinery Limited on account of supply of 9B[its] products.” 4 Substituted for “4[(43A) The provisions of section 153, shall not apply to payments received by M/s Total PARCO Pakistan Limited for the supply of petroleum products.]” by the Finance Act, 2003 → EXPLANATION VIDE IT CIR. NO. 1 OF 2007 DATED THE 2nd JULY, 2007. EXEMPTION TO PERMANENT ESTABLISHMENT (PE) OF NON-RESIDENT PETROLEUM EXPLORATION & PRODUCTION COMPANIES. [Second Schedule Part IV, Clause (43A)] Law provides exemption from withholding tax on any payment received by an oil distribution company or an oil refinery for supply of its petroleum products. In order to bring at par the non-resident petroleum exploration & production companies, PEs of the non-resident companies have also been exempted from withholding tax on supply of crude oil and gas. EXEMPTION OF WHT ON PAYMENTS TO TRAVELING AGENTS FOR SALE OF AIR TICKETS. [Second Schedule Part IV, Clause (43B)] Traveling agents are paid commission by airlines which is liable to WHT @ 10% and is treated as final tax. While receiving payments on account of sale of air tickets, the same are again subject to WHT tax, which being excess deduction is refundable. a new clause (43B) has been inserted in Part IV of Second Schedule to the Income Tax Ordinance, 2001. Consequently, withholding tax on sale of air tickets made by traveling agents who have paid WHT on their commission income, will not be collected. 5 Words “including Permanent Establishment of Non-resident Petroleum Exploration and Production (E&P) Companies” omitted by the Finance Act, 2008, it was earlier inserted by the Finance Act, 2007. 6 Clause (43B) inserted by the Finance Act, 2007. 7 Omitted by the Finance Act, 2003. The omitted clauses (43B), (43C), (43D) and (43E) read as follows: 7[(43B) The provisions of section 153 shall not apply to the payments received by Al Rahim Trading Co. (Pvt.) Limited, Karachi for the supply of petroleum products.] 7[(43C) The provisions of section 153 shall not apply to the payments received by Hascombe Storage (Pvt) Limited, Karachi, for the 2nd Sch. P. IV 286 The Income Tax Ordinance, 2001 1[(44)] (45) The provisions of 2[sub-section 3[(1)] of section 153] shall not apply to any manufacturer-cumexporter as 4[the prescribed person]: Provided that(a) the manufacturer-cum-exporter shall deduct tax from payments made in respect of goods sold in Pakistan; (b) if tax has not been deducted from payments on account of supply of goods in respect of goods sold in Pakistan, the tax shall be paid by the manufacture-cum-exporter, if the sales in Pakistan are in excess of five per cent of export sales; and (c) nothing contained in this clause shall apply to payments made on account of purchase of the goods in respect of which special rates of tax deduction have been specified 5[under the provisions of the repealed Ordinance]. 6[(46) the provisions of sub-section (1) of section 153 shall not apply to any payment received by an oil distribution company or an oil refinery 7[or Permanent Establishment of Non-resident Petroleum Exploration and Production (E&P) Companies] for supply of its petroleum products.] 8[(46A) the provisions of sub-section 9[(6)] of section 153 shall not apply to any payment received by a manufacturer of iron and steel products relating to sale of goods manufactured by him.] (46B) 11[ [10] ] supply of petroleum products.] 7[(43D) The provisions of section 153 shall not apply to the payments received by M/s. Overseas Trading Corporation, Karachi, for the supply of petroleum products.] 7[43E) The provisions of section 153 shall not apply to the payments received by M/s. ICI Pakistan Limited, for the supply of petroleum products.]” 1 Omitted by the Finance Act, 2005. The omitted clause (44) read as follows: “(44) The provisions of section A[148] shall not apply to an indirect exporter as defined in the Duty and Tax Remission for Export Rules, 2001 issued under Notification No. S.R.O. 185(I)/2001, dated the 21st March 2001.” A Substituted for the figure “153” by the Finance Ordinance, 2002. 2 Substituted for the word and figure “section 153” by the Finance Ordinance, 2002. 3 Substituted for “(6)” by the Finance Act, 2003 4 Substituted for “a payer” by the Finance Act, 2003 5 Substituted for “in exercise” by the Finance Act, 2003 6 Substituted by the Finance Act, 2004. The substituted clause (46) read as follows: “(46) The provisions of 2A[sub-section (1) of section 153], shall not apply in respect of payments received on account of supply of petroleum products by Attock Petroleum Limited.” 2AEarlier the word and figure “section 153” substituted by the Finance Ordinance, 2002. 7 Words inserted by the Finance Act, 2008. 8 Clauses (46A) & (46B) inserted vide SRO 847(I)/2007 dated the 22nd August, 2007. 9 Substituted for “(6B)” by the Finance Act, 2008. 10 Clause (46B) omitted vide the Finance Act, 2009, the omitted text read as follows: the provisions of sub-section (6B) of section 153, in so far as they relate to payments on account of sale of goods from which tax is deductable under section 153, shall not apply in respect of an individual or association of persons being a manufacturer of such goods, for the tax year 2007. 11.Omitted by the Finance Act, 2004. Earlier clause (46A) was inserted by S.R.O. 855(I)/2003 dated 29.08.2003. The omitted clause (46A) read as follows: 2nd Sch. P. IV 1[ ] 2[ ] (47) 287 The Income Tax Ordinance, 2001 [3] 4[(47A) The provisions of section 153 shall not apply in respect of payments received by a resident person for supply of such goods as were imported by the same person and on which tax has been paid under section 148. 5[(47B) The provisions of sections 150, 151 and 233 shall not apply to any person making payment to National Investment Unit Trust or a collective investment scheme or a modaraba or Approved Pension Fund or an Approved Income Payment Plan or a REIT Scheme or a Private Equity and Venture Capital Fund or a recognized provident fund or an approved superannuation fund or an approved gratuity fund.] 6[(47C) The provisions of sub-section (1) of section 154 shall not apply to an exporter in respect of cooking oil or vegetable ghee exported to Afghanistan, from whom advance tax has been collected under section 148 on import of edible oil.] 7(47D) The provisions of sub-section (6A) of section 153 shall not apply to cotton ginners. [8] “(46A) The provisions of sub-section (1) of section 153, shall not apply to the payments received by M/s. TOTAL PARCO Pakistan Limited (TPPL) for the supply of petroleum products.” 1 Omitted by the Finance Act, 2004. Earlier clause (46B) was inserted by S.R.O. 856(I)/2003 dated 27.08.2003. The omitted clause (46B) read as follows: “(46B) The provisions of sub-section (1) of section 153, shall not apply to the payments received by M/s. Enar Petrotech Services (Pvt) Limited for the supply of its petroleum products.” 2 Omitted by the Finance Act, 2004. Earlier clause (46C) was inserted by S.R.O. 857(I)/2003 dated 27.08.2003. The omitted clause (46C) read as follows: “(46C) The provisions of sub-section (1) of section 153, shall not apply to the payments received by M/s. Bosicor Pakistan Limited for the supply of its products.” 3 Clause (47) omitted vide the Finance Act, 2009, the omitted clause read as follows: The provisions of 3[sections 151 and 155] shall not apply to a person who produces a certificate from the Commissioner of Income Tax concerned to the effect that his income during the income year is exempt from tax. 3 Substituted for the word and figure “section 153” by the Finance Ordinance, 2002. 4 Added by the Finance Ordinance, 2002. 5 Clause (47B) substituted by the Finance Act, 2008, the replaced clause read as follows: (47B) The provisions of sections 150, 151 and 233 shall not apply to any person making payment to National Investment (Unit) Trust or a mutual fund established by the Investment Corporation of Pakistan or 5[a collective investment scheme authorized or registered under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 or a modaraba] 5[or Approved Pension Fund or an Approved Income Payment Plan constituted by a Pension Fund Manager registered under Voluntary Pension Systems Rules, 2005] 5[or a Real Estate Investment Trust approved and authorized under the Real Estate Investment Trust Rules, 2006, established and managed by a REIT Management Company licensed under the Real Estate Investment Trust Rules, 2006 5[or a Private Equity and Venture Capital Fund]]. 5 Substituted for the words, figures and comma “an investment Company registered under the Investment Companies and Investment Advisors Rules, 1971 or a Unit Trust Scheme constituted by an Asset Management Companies Rule, 1995, or a modaraba management company” by the Finance Act, 2003. 5 Added by the Finance Act, 2005. 5 Words, figures and commas inserted by the Finance Act, 2006. 5 Words inserted by the Finance Act, 2007. 6 Inserted by the Finance Act, 2004. 7 Inserted vide SRO 989 dated the 19th September, 2005 8 Omitted by the Finance Act, 2003. The omitted clauses (48), (49), (50) and (51) read as follows: “(48) The provisions of section 236 shall not apply to a person who produces a certificate from the Commissioner of Income Tax 2nd Sch. P. IV 288 The Income Tax Ordinance, 2001 (52) [1] 2[ ] 3[ ] 4[ ] 5[(56) The provisions of section 148, regarding withholding tax on imports shall not apply in respect of— concerned to the effect that his income during the income year is exempt from tax. (49) The provisions of section 236 shall not apply where the subscriber is a non-taxable non-profit organisation. (50) The provisions of section 234 shall not apply to a person who produces a certificate from Commissioner of Income Tax concerned to the effect that his income during the income year is exempt from tax. (51) The provisions of section 235 shall not apply to a person who produces a certificate from the Commissioner of Income Tax concerned to the effect that his income during the income year is exempt from tax.” 1 Clause (52) omitted vide the Finance Act, 2010, the omitted clause read as follows: The provisions of ² clause (vi) of Notification No. SRO 593(I)/91, dated the 30th June, 1991, shall not apply to any importer being an industrial undertaking engaged in the manufacture of vanaspati ghee or oil. ² CLAUSE (VI) OF NOTIFICATION NO. SRO 593(I)/91, DATED THE 30TH JUNE, 1991; (vi) persons, other than commercial importers, who produce a certificate from the Commissioner of Income Tax concerned to the effect that; a) there income during the income year is exempt from tax; b) there income during the income year is not likely to be chargeable to tax; or no tax is likely to be payable by them on their income during the income year on account of any brought forward loss, depreciation allowance or tax credit; 2 Omitted by the Finance Act, 2005. The omitted clause (53) read as follows: “A[(53) The provision of B[sections 148 and 153] shall not apply to the wheat imported by Trading Corporation of Pakistan in pursuance of Economic Coordination Committee of the Cabinet decision No.ECC-67/5/2005 dated the 2nd July, 2004.]” A Added by SRO 833(I)/2004, dated 29.09.2004. B The word and figure “section 148” substituted by SRO 918(I)/2004, dated 11.11.2004. 3 Omitted by the Finance Act, 2005. The omitted clause (54) read as follows: “A[(54) The provisions of section 148 shall not apply to sugar imported in pursuance of Economic Coordination Committee of the Cabinet’s decision No.ECC16/2/2005 dated 08.02.2005.]” A Added by SRO 174(I)/2005, dated 17.02.2005. 4 Omitted by the Finance Act, 2005. Earlier this was inserted by S.R.O. 423(I)/2005, dated 13.05.2005. The omitted clause (55) read as follows: “(55) The provision of section 148 shall not apply to the import of the following items, namely:(a) onions; (b) potatoes; (c) tomatoes; (d) garlic; (e) halal meat of (1) (i) goat; and (ii) sheep; and (2) beef; and (f) live animals (bovine animals i.e. buffalos, cows, sheep, goats and camels only).” 5 Clause (56) substituted by the Finance Act, 2008, the replaced clause read as follows: 5[(56) 5[The provisions of section 148, shall not be applicable to the import of goods classified under Pakistan Customs Tariff falling under Chapters 27, 52.01, 86 and 99.] ___________________________________________________ 5 Added by the Finance Act, 2005. 5 Clause (56) substituted vide SRO 567(I)/2008 dated the 11th June, 2008, old text read as below: Ê The provisions of section 148, regarding withholding tax on imports, shall not apply in respect of;(i) goods or classes of goods imported by contractors and sub-contractors engaged in the execution of power project under the agreement between the Islamic Republic of Pakistan and Hub Power Company Limited; (ii) such specially equipped motor vehicle or support equipment imported by a disabled person, as is allowed by the Federal Government; (iii) such goods imported into Pakistan as are exempt from customs duties and sales tax under Headings 9913, 9914 and 9915 of Sub- 2nd Sch. P. IV 289 The Income Tax Ordinance, 2001 Chapter III of Chapter 99 of First Schedule the Customs Act, 1969 (IV of 1969); (iv) goods imported by direct and indirect exporters covered under (a) Sub-Chapter 4 of Chapter XII of S.R.O. 450(I)/2001 dated 18.06.2001; (b) Sub-Chapter 6 of Chapter XII of S.R.O. 450(I)/2001 dated 18.06.2001; and (c) Sub-Chapter 7 of Chapter XII of S.R.O. 450(I)/2001 dated 18.06.2001; (v) goods specified under Heading 9929, Sub-Chapter VIII of Chapter 99 of the First Schedule to the Customs Act, 1969 (IV of 1969); 5[(vi) Liquefied Petroleum Gas (LPG)] 5[(vii) Liquefied Natural Gas (LNG)] (viii) agricultural tractors imported in CBU condition; (ix) an indirect exporter as defined in the Duty and Tax Remission for Export Rules, 2001 issued under Notification No. S.R.O. 85(I)/2001, dated the 21st March 2001; Â 5[Radio Navigational Aid Apparatus imported for an airport or on after First January, 2006.] (x) (xi) [5] (xii) import of the following items, namely:(a) onions; (b) potatoes; (c) tomatoes; (d) garlic; (e) halal meat of(1) (i) goat; and (ii) sheep; and (2) beef; and (f) live animals (bovine animals i.e. buffalos, cows, sheep, goats and camels only;) 5[and] (xiii) [5] 5[(xiv) goods donated for the relief of earthquake victims as are exempt from customs duties and sales tax]5[; and (xv) tents , tarpaulin and blankets] 5[(xvi)] [5] 5[(xvii) import of ships and floating crafts including tugs, dredgers, survey vessels and other specialized crafts, registered in Pakistan.] 5[(xviii) goods specified in column (2) of the Table below, falling under the PCT heading number mentioned in column (3) of the said Table, namely:TABLE S.No. DESCRIPTION OF GOODS. PCT HEADING NUMBER. (1) (2) (3) 1. Camera. 9007.1100 2. Studio lights. 9405.4010 3. Screen. 9010.6000 4. Camera all kind

The Income Tax Ordinance, 2001 Up-to July 2010

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